WHAT IS AN EMERGENCY FUND?

By in Saving | 8 comments

Last week I brought in our 2003 Honda CRV for it’s 75,000 check up. I figured the bill would run about $150.00. Five hundred dollars later, I picked up the car. Don’t ask what was done because when a car gets thousands of miles under the hood, stuff needs to be replaced. Anyhow, it’s cheaper than getting a new car.

This week Jr. Carina got a flat in the 1998 Isuzu Trooper she and I share. I expected a twenty five dollar patch job would fix it. Of course not, the tire needed to be replaced. When all was said and done, there was a $160.00 bill. This months visa bill included plane tickets to a Financial Bloggers conference and tickets across the country to visit relatives. Although the travel costs weren’t emergencies, they certainly boosted our monthly expenses. Add some new furniture for Jr. Carina moving back in after college to attend graduate school and the bills hit the roof this month.

The car expenses were unplanned. Although we have an annual budget for car repairs, the unknown factor is when these repairs will occur. The same goes for travel. We can afford the furniture, or we wouldn’t have bought it. The bills this month were high.

The emergency fund is a savings or money market account with ready cash available for unplanned expenses.

Emergency may be a misnomer, because you may need extra cash in a month when extra bills come through. We pay our car insurance twice a year and in January and June, we need access to additional funds to pay the premiums. A pipe breaks and that is an unplanned emergency. In that case you absolutely need the cash. No one’s expenses are exactly the same every month. For that reason you need a financial cushion.

If the big bad stuff happens; you lose your job, have a legal or medical problem, the emergency fund is crucial. For the other occasional months when expenses surpass income, you must have a fat savings cushion.

How to Build an Emergency Fund

Life sucks when you have no emergency fund. There is some research stating that having an emergency fund correlates with a positive state of mind.

You’re convinced of the importance of having an emergency fund and here’s how to start developing one immediately.

Consider opening a special savings account just for extra cash needs, separate from any long term savings goals.

Contact your personnel office and arrange to have a couple of hundred dollars transferred from each paycheck to a bank savings account. You will need to give them the type of account, the account number, and the routing number. You can get the routing number from the bank or  if you have a check, it’s the first string of numbers on the bottom.

If you can only spare fifty bucks a paycheck, start there. Don’t worry about the amount withdrawn. The key is to start. So many folks feel like they can’t save a big chunk at a time, so they don’t save anything at all. That will not work. Save as much as you can, even if it’s a small amount. You can increase it later. Moolanomy has some tips to find a bank with decent interest rates.

Develop the savings habit and you are on the path to financial prosperity.

When to Use the Emergency Fund

You’ll be tempted to dip into the fund regularly. Hold yourself back. Let the fund build up. If you’re regularly spending more than you’re earning, cut back on spending! Consider a side hustle to bring in some extra cash. Modest Money is starting a new side hustle series with ideas for extra cash.

If you take no action, you will see no results.

Ideally, build the emergency fund up to a few months salary. But even a few hundred dollars can provide some relief. Use the funds only for unplanned financial surprises in lieu of putting the expenses on a high interest rate credit card. You may have some setbacks along the way. That’s to be expected.

Do not stop contributing to the emergency fund. Sparingly draw from the fund. As the fund grows in size, so will your financial confidence.

Final Thoughts

On occasion, you may need a short term loan. Don’t let set backs hold you back from building savings (about that, keep putting a small amount away, no matter what!) But, in the long run, an emergency fund is one key to wealth building.

Do not forget to use cash for spending if you have trouble with overspending. If you need to use a credit card, pay the balance off in full.

Motivate yourself by thinking about how great you will feel with a cash cushion.

Why You Need an Emergency Fund at:

Do you have an emergency fund? How do you contribute? What expenses do you use the fund for?

image credit; google images- girls just want to have funds

    8 Comments

  1. It is indeed a good practice to set aside an emergency fund. You’ll never go wrong especially when something unexpected happened. Remember, you cannot always use your credit card.

    Joseph Y

    June 7, 2012

  2. I’ve actually only used my emergency fund a couple of times, and it was never really for an emergency. Basically, when it built up enough interest, I drew down some of the overage to fund a couple of big things we needed done around the house after we moved in. That was when interest rates were high so it was earning a lot every month. Nowadays, we have no such concerns 🙂

    Money Beagle

    June 7, 2012

  3. I have an emergency fund of about $5K, but I hate using it. It’s dual purpose to me – if I don’t need it by the time I buy a house, most of it is going into the house as a downpaymnent.

    Daisy

    June 7, 2012

  4. @Joseph-Unless you intend to pay off the balance on your credit card in full, you are best served to use cash for any emergencies.
    @Money-Nothing wrong with that strategy. The important thing is to have cash on hand for irregular expenses, so you don’t need to charge or borrow.
    @Daisy-Hang on to that distaste of dipping into the fund. Let it grow, and your plans for the cash sound like a long term win win.

    Barb

    June 7, 2012

  5. It’s great idea to squirrel away 5-10% of your salary into a lock box fund for emergency expenses.

    Shilpan

    June 7, 2012

  6. I set aside an emergency fund in the event a true emergency happens, such as an accident, big unplanned medical bills, sudden job loss, etc. I think that how one actually defines an “emergency” can play a big role in how this fund is handled. Some things people considered emergencies are more like unplanned expenses.

    Squirrelers

    June 8, 2012

    • @Squirrelers and Shilpan- I have a tendency to be a worrier. I combat that tendency with over planning. I tend to keep a stash of cash for any “what if”, whether it be a true emergency or an unbudgeted expense that snuck up on us.

      Barb

      June 8, 2012

  7. I agree that you should just start,no matter how little you can put aside. This will get you in the habit of saving, and you can always increase the amount in the future.

    Jon Rhodes

    June 14, 2012

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