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 an online savings account 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 02.06.13 with 4 comments.