If you don’t yet have an emergency fund, I’ll be dramatic enough to say that this would be the most important new year’s resolution to make in 2015. Of course I’m an advocate for cleaning up your diet and adding more physical activity into your routine. However, there are far too many people who would be financially wrecked by an emergency because they don’t have a reserve to help them out.
Visits from Murphy
Murphy’s law is the concept “if it can go wrong, it will.” It’s quite a pessimistic thought but if you have an emergency fund established then Murphy doesn’t seem that intimidating. If your dryer comes to the end of its life, but you have an emergency fund then you won’t face going into debt to replace it because you can cover the cost in cash. Anxiety won’t be so prevalent when you’re prepared for financial speed bumps life throws at you. If you haven’t thought twice about an emergency fund until now or simply don’t know how to go about setting one up I’ll give you a few pointers and tips that I personally used to establish my emergency fund as one of my goals in 2012.
Do the Math
A typical emergency fund should cover 3-6 months of essential expenses (Note: cable is NOT an essential expense… we’re talking food and shelter-type of essentials here). Do the math and add up your essential expenses, multiply it by 3-6 months, and that should be your goal. If you have a spouse with a full time job then maybe you only need 3 months worth (because chances are that you won’t both lose your job at the same time). But, if you are the sole provider for your family then a 6-month fund may be a wiser choice. I felt comfortable with 3 months but my husband felt comfortable with 6 so we went with 6 months. Remember, it’s about peace of mind and not having to worry about visits from Murphy.
Keep your Emergency Fund Separate From Your Checking Account
If you don’t have a system to organize your finances it can be difficult to remember how much you have saved for vacation, how much is in your emergency fund, and how much you set aside for your clothing budget. I find it extremely easy to track my goals and specific savings categories with a Capital One 360 savings account (<– you can read my article to learn more about it). I’ve never been paid or asked to promote this savings account; I just love how simple it is to use and that I can see exactly how much I have in my emergency fund, vacation fund, new clothing fund, or whatever additional categories I create. My savings goals are much more organized because of this simple feature.
Automatic transfers can seem intimidating because it means you are making a commitment. However, money tends to slip away when we don’t put it to work. For example, knowing you have an extra $50 each month for wiggle room might lead to buying a coffee on the way to work a few times a week or becoming more lenient with your grocery budget. Setting up that $50 of wiggle room money as an automatic transfer to your emergency fund can help you become more disciplined with spending and reaching your goals faster. Plus, you’re putting the money into an emergency fund, so if a hiccup comes along you will have the means to take care of it.
Good intentions remain good intentions unless they’re acted upon, right? You’ve thought about setting up an emergency fund for a while, but until NOW it’s been just that… a thought. Even if you only put $50 in your account to start off you are moving in the right direction. Funding my emergency fund was a smooth transition for me because once my $30,000 student loans were paid off I took what would be my monthly loan payment and started padding my emergency fund. If you’ve got momentum started, why stop?
For seasoned savers- How did you fund your emergency fund? Do you keep it in a separate account from the rest of your money?
This post has been written by Jessica from BudgetForHealth.com.
My name is Derek, and I have my Bachelors Degree in Finance from Grand Valley State University. After graduation, I was not able to find a job that fully utilized my degree, but I still had a passion for Finance! So, I decided to focus my passion in the stock market. I studied Cash Flows, Balance Sheets, and Income Statements, put some money into the market and saw a good return on my investment. As satisfying as this was, I still felt that something was missing. I have a passion for Finance, but I also have a passion for people. If you have a willingness to learn, I will continue to teach.