Start an Emergency Fund
Most Americans live paycheck to paycheck spending every last dime by the end of the month. The sad thing is that many people consider themselves financially responsible when they do this. They say things like – “I can afford everything I buy” or “I am living within my means.” While this is definitely better than racking-up huge credit card bills each month it is still financially irresponsible.
What most people fail to take-into account is the unexpected events that life can throw our way. Your car could break-down and require costly repairs, a water-pipe could break in your house, or worse you could always lose your job. When this happens a lack of savings could cause you to lose your house, your car, and even file for bankruptcy all because you didn’t take the time to prepare financially.
Well I’m here to tell you that you need an emergency fund and best of all you can start one today. So what is an emergency fund? An emergency fund is a bank account that you consistently contribute to and use ONLY in an emergency. This is where most people get a bit confused. See most people think of an emergency fund and a savings account as the same thing. While you will most likely keep your emergency fund in a savings account – this is not to be used for saving-up for a planned expense.
Here’s an example. Suppose you want to buy a new car – many people would set a goal of how much money they need to save and put-away a little money each month. If you asked that person if they had an emergency fund they would probably say – “yes – I put money away in savings every month!” The problem is that once they reach their goal the savings account is reduced to zero and exchanged for a new car.
An emergency fund is an account that you put money in and ONLY take money out of in the case of an emergency. Buying a new car, a new house, or paying for a luxurious vacation is NOT an emergency. An emergency is something unexpected that happens that would normally throw you into financial destitution – it is in these situations that you’ll be glad that you have an emergency fund.
If you’ve ever seen the Suze Orman show you know that she suggests you build-up at least an eight-month emergency fund. This means you should have eight times your monthly income saved in your emergency fund. That can sound pretty overwhelming but believe it or not it is very achievable. The trick is – you need to start now! Don’t start tomorrow, don’t start next week – start your emergency fund now.
So how can you get started with an emergency fund? Follow the steps below to get your emergency fund started:
1) Create a completely separate bank account at a different bank specifically for your emergency fund. This is a crucial step – if you create an account at your regular bank you may be tempted to take money out of the account.
2) Put your savings on auto-pilot. Have your main bank account automatically send money to your emergency fund each month. Follow the pay yourself first methodology here.
3) Start with an amount you can reasonably contribute. Don’t go overboard – a small amount can add-up over time. Even if it is only $25 or $50 a month it will make a BIG difference over time.
4) Stick with it. No matter how slowly your emergency fund seems to be building just stick with it. Five years from now you’ll be glad that you did.
5) NEVER take money out of you emergency fund unless it is an absolutely emergency. If you aren’t sure if something is an emergency then it probably isn’t!
That’s it – follow the five steps above and you’ll be on the road to building an emergency fund and preparing for the unexpected events that life throws at you. Trust me – you’ll sleep better at night knowing you have an emergency fund and that alone is worth it!
