An emergency fund is like your own personal insurance plan, except that it’s there when you need it without having to jump through hoops or wait for outside approval.
An emergency fund gives you peace of mind when it’s not being used, and can save your rear when you do need to use it. But how do you build one with all the other pre-existing claims on your money?
Here’s how to do so, in six easy steps:
1. Commit to doing so.
Don’t let the words, “I know it’s important, but…” pass your lips. Building an emergency fund IS important, so make it a priority.
2. Define an emergency.
Decide what types of thing will constitute an emergency, and put those things in writing. My emergency fund is only for two types of things: job loss and for if someone is bleeding and needs an unexpected trip to the hospital. Your emergency fund can cover whatever you’d like.
Keep in mind that the more things it’ll cover, the bigger it will need to be. Having a clear, written decision about what your fund will be used for is critical. Otherwise you’ll be tempted to use it for every little thing, and it will quickly dwindle to nothing.
3. Set a starter target amount for your fund.
This should be an amount that you feel you’ll be able reach fairly quickly. It could be $100, $1000, or some other initial amount. Just make it something that feels doable to you instead of overwhelming.
4. Find a way to reach that first target amount quickly.
Can you reduce expenses? Increase income by doing odd jobs or getting a second job? Or maybe you’ll decide to add any change you have at the end of every day to it, to add a percentage of each dollar earned, or to add a matching amount of money to the fund each dollar you spend on non-necessities.
5. Open an account for your emergency fund.
Your emergency fund needs a place to life, so open up an account and put the first bit of money in it. I have a savings account at INGDirect for mine.
6. Keep going.
Keep adding money to your fund until you reach that first target amount. Then set a new, slightly larger target and continue on until you reach that. Continue on until your reach your final target. Most people set that as several month’s worth of expenses. (Not income.) Mine is set at 12 month’s worth of expenses. Keep in mind that there probably will be setbacks and tests. Keep going despite those, and you will get there.
Posted in Emergency Funds on 05.03.10 with 18 comments.
We have our efund going to an ING account as well. The only issue is this: we haven’t decided what’s an emergency! Not in writing. And to that I have a question.
If you had no available cash and you had an unexpected bill pop up, would you pull from your efund or put it on a credit card or what? I think that is our dilemma. Deciding whats an emergency.
Lenci, define an unexpected bill? If I didn’t have the cash and it wasn’t on my list of emergencies, I’d nearly always say no to doing whatever it was until I did have the money. Most things that “pop up” don’t really have to be done. It’s just inconvenient not too. I’d also then add the item (if it seems likely to be repeatable) to my spending plan so I can plan ahead for it next time.
Another option is to go out and earn the money by doing odd jobs, selling stuff, etc.
That makes sense. I had to fly to Texas for a family emergency…I didn’t have to have to, but I felt that it would be the best route to take. Some things we likely don’t need to do. We’re both taking odd jobs now in order to build up a stronger efund. And starting today, I plan on starting a discussion to see what we will consider an emergency.
Thank you!
Happy discussing! Sounds like you’re making an emergency fund the priority
We have an efund but it’s not touchable really. If we have car or house problems, we have a home and auto maintenance fund. If we lose a job, we can live on one salary. If we literally have an emergency so large that the proper maintenance fund can’t cover it (like a huge medical bill), we’d then use the vacation fund, then our fun money accounts, and lastly the efund.
That’s pretty much how we have stuff set up too, although I would be very depressed indeed if it was an emergency that required dipping into the travel fund…
I love that you started the process with making a commitment.
I’ve coached people to put off the mechanics of fixing their finances until they were mentally, emotionally and spiritually vested. The process of changing ones ways with money is extremely challenging. I think most people fail because they simply think it’s a good idea or “want to”. As soon as going gets a little tough they are back to their old ways.
Commitment is crucial.
Thanks, Frank. I feel the same way about commitment being crucial.
Some people really DON’T have a single cent to spare for an emergency fund. But a lot more only THINK they don’t have it. That’s why step #4 is so important.
I wrote an article for MSN Money called “An emergency fund out of thin air” and interviewed folks who found extremely creative ways to meet their EF goals.
http://articles.moneycentral.msn.com/SavingandDebt/SaveMoney/an-emergency-fund-out-of-thin-air.aspx
(Hope it’s okay to post URLs here…?)
These people did everything from recycle cans and bottles to pick up coins from the street to peck away at their savings goals. But they had other interesting tactics, too.
Donna, you’re completely right, some people really don’t have a cent to spare. When I first started trying to set aside money, I put a dollar into savings with every paycheck. (Then I almost always withdrew the dollar again before I got my next check. I remember being mortified going into the credit union and telling them I needed to withdraw a dollar, but oh well.)
But I also believe that many more people just think they don’t have the money. For me commitment is the most important step. Once you’re committed, you WILL find a way. Sounds like that’s what the people in your article did. People need to remember too that the goal should be something they feel is attainable. It’s ok if it’s a very small amount to start with. ANY amount helps.
(And sure, related links are fine.)
And its amazing how fast it will build up! When that momentum starts to kick in and the dollars add up…total rush and awesome feeling of security.
Yup it seems like once you hit that first target, things go faster.
Good advice. The priority must be to define emergencies. There are “generic” emergencies and then there are individual’s own.
Thanks, I think it’s good for each person to draw their own line in the sand about what will be considered an emergency.
I sold things that I did not want to sell to get my fund. And I worked extra jobs. You do what you have to do to make this happen.
Sounds like you definitely made it happen
It’s difficult to just “keep adding money” when bills are tight and you feel you need every single cent from your paycheck. I’ve been there and know how difficult it was to spare extra funds into my savings.
What people starting emergency funds really need is a reminder and a reality check. I have included a spit in my budget (http://www.27andfrugal.com/2009/12/30/how-to-make-your-2010-budget/) specifically for savings. Not only does this remind me every month to transfer, but it also shows me that I do have 10% of my income to spare. If I include it into my budget, putting money into my savings doesn’t feel like a loss of any sort. It’s just another bill in the budget to be paid.
Leslie, you’re right, it’s difficult to do when things are tight. Including savings in your budget is a great way to go. I like to do investing that way too.