Tip of the Week #2
Posted by themoneylearner on January 13, 2009
Create an Emergency Fund….Now
The last tip explained the importance of creating a budget and controlling your spending. Now that you have that under control it is time to create an emergency fund. This is something that is difficult for many of us because we always want to do something with our money. We either want to spend it on something now or we want to save it to spend on something specific later. For some reason it is against our human will to just simply save money and put it away ‘just in case.’
Why should you create an emergency fund?
- It gives you peace of mind and greatly reduces risk. If you were to lose your job right now how stressful would that be? I can promise you it would be a lot less stressful if you had 3 to 6 months worth of expenses saved away.
- It will prevent you from having to go deeper into debt. Let’s say the dreaded ‘Check Engine’ light comes on in your car and you take it to the mechanic and learn that it needs $800 worth of repairs. Almost everyone looks at this as devastating news and it is always at the worst possible time. Now you have to scramble together a way to come up with $800 or you have to put it on a credit card. Now if that were to happen and you had $1000 in an emergency fund then nothing in your life changes except your balance in the ‘ol reliable emergency fund.
How do you start an emergency fund?
Most experts say that you need to have 3 to 6 months worth of expenses (not income) in your emergency fund. While I agree, it isn’t necessary to have that much in your e-fund right away. I personally love the approach Dave Ramsey preaches in The Total Money Makeover. That involves saving $1000 for your e-fund and then focusing on paying off your debt. Once your debt is paid off then it is time to create a fully funded emergency fund.
Where should I keep my emergency fund?
It needs to be liquid. That means keep it out of the stock market. This money serves the purpose of protecting you, not to make you rich. I would suggest an online savings account that earns you 3-4% interest. However, it is better to keep it under your mattress then it would be to get fancy with it in the stock market. Keep it simple with this money because when you need it you don’t want it to be tied up in an investment that is currently down 30% from when you bought it. Just stick it into a savings account or keep it in a safe at home.
When should I start my emergency fund?
This is something that you should not procrastinate on any longer. Eventually something is going to come up that will put you back months if you don’t have an e-fund. Either put money you already have aside for your emergency fund or start saving for one today. Having no emergency fund is like being a quarterback with no offensive line trying to avoid a blitz from debt. Eventually you will get sacked.
