Emergency Funds

Accidents Will Happen

How Do I Start An Emergency Fund?

There are a couple of things that we like to suggest.  First, start a money market account at a bank.  These earn a decent amount of interest and they allow you to write up to 6 checks against it each month.

If you can’t start a money market account then you can go with a standard checking account, but make sure that the money is difficult for you to get to.

We highly suggest opening a new account with a bank other than the one you currently use that way you aren’t tempted to transfer money out of your Emergency Account and into your checking to use.  After you have set up the account, see if you can set up a partial direct deposit with your place of employment.  Some employers will allow you to direct deposit money into one account, and the remainder of your check into another.

Over time, your emergency savings will build from a few twenty dollar bills a month, into a few hundred, then into a few thousand.  It is possible that an event could occur before you have enough money, but even being able to cut it in half is worth it, and then you just continue building it.  But you must act like this money does not exist!  This money is not meant to pay for a new TV, or a new bed set, it is meant to help you in a real emergency!

A Recap of the Steps To Start an Emergency Account:

1. Open a money market or checking account at a bank that you don’t already use.
2. Set up direct deposits to that account, you won’t miss the $20-$40 each paycheck.
3. Act like the money doesn’t exist unless an emergency arises.

How Much Should I Save?

The generally accepted rule of thumb is at least 3-6 months worth of your expenditures.  What this means is that you should total up what all of your bills are including electric, water, groceries, gas, and all of those other fluctuating bills (overestimate to be safe) and multiply that number by 3,4,5, or 6 depending on how many months you want to save for.  We suggest 6 months because it’s obviously the most stable and it will give you half a year to find a new job and stop living off of the savings, but it is up to you.  If you must, start out with 3 months as your goal, and once you reach it, move on to 4 months, then 5 months, and then finally 6 months.

When Do I Use The Emergency Fund

A lot of people fail to do step 3 above.  Many people like to watch the money grow, and they take pride in seeing what they’ve accomplished.  The problem with this is that you are always well aware of how much money you have in there.  Out of sight is out of mind, and you must succeed in this.  This money is not meant for an “emergency sale” at JCPenneys, this money is not for buying the bedroom set you have always wanted, and this money should not be for fixing the car.

Wait, isn’t fixing the car an emergency? NO!  You know your car is going to break down!  You should already have a separate savings for that!  The emergency fund is a catch-all for the unforeseeable like a kid breaking an arm, or a car accident to which you have a large deductible to pay.  You are not budgeting this for your electric bill, and likewise, you are not budgeting for your car repair.  Your electric bill is more predictable, that is true, but you know something is going to happen with your car so set money aside for it.

Without splitting hairs too much, you should accept the advice we are offering.  Is it a tease having $6,000.00 in savings for emergencies that may never arrive and all you want is that $1,500.00 TV?  Absolutely, but this is part of being a responsible adult.  What good will that TV do if you went into bankruptcy?  Don’t let your belongings control you, and prepare for disaster.

Related Links:

• Is your emergency fund a credit card?

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