Not having an Emergency Fund IS an Emergency

This is my first guest post, from lucky writer Allen Long. Alan enjoys writing about economic news, finance, and employment verification, and long walks on the beach. Take it away Allen…

Financial emergencies are not only common, they’re inevitable. Whether you lose your job, acquire sudden medical expenses, your car breaks down, or a water pipe explodes, making your home inhabitable, unforeseen circumstances can easily make having an emergency fund necessary. Not having the funds to handle a situation like this can cause you to lose your home, lose your job, or ruin your credit rating. Being prepared is part of being financially responsible. The following guidelines will help you begin an emergency fund to ensure your future financial stability should you face an emergency situation.

How Much Do I Save?
The general rule of thumb has always been to save at least 3 months’ worth of living expenses. With the current state of the economy however, it could be beneficial to aim for 6 or even 9 months instead. If you should lose your job, it could take some time to find something else. Unless you want to have to settle for something you really don’t want to do, saving enough money for a sufficient job search is the only way to fully protect yourself.

Don’t Mix
It’s important to know the difference between an emergency and other forms of savings. You don’t want to mix your emergency funds with your vacation funds, for example. If you’re saving for a wedding, keep the emergency money separate. The best way to do this is to have separate accounts for the two. Keep your emergency funds somewhat liquid without making them too easy to access. Don’t get a debit card for the account. This way, it is there when you need it, but not easy to grab when you don’t.

How to Start
You don’t want to start off by dumping half your paycheck in the account. This might trigger a financial emergency earlier than it has to be. Start out small. If you generally have trouble saving, try putting 5 percent of your pay into the account. Chances are you won’t notice this amount, and you can always bump it up later on. Don’t get discouraged; it will take a while to accumulate 3 or 6 months’ worth of expenses. The important part is to start saving as soon as possible and save something every single paycheck. If you are particularly short on cash one week, throw $10 in the account. Everything adds up, and once you convince yourself you can skip one week, you’ll quit putting money in altogether. Stay consistent.

Don’t Spend It
What’s the point in having it if you can’t spend it? I know the temptation is tough when you’ve got that money sitting there and you want to take a much needed vacation. However, you must resist. Dipping into your emergency fund for non-emergencies is the fastest way to spend the money before an emergency happens. This fund needs to be limited to real emergencies, such as the loss of a job or another financial disaster. Be tough on yourself.

Having an emergency fund will give you peace of mind and lessen your stress should an emergency arise. Don’t take it for granted. If you do lose your job, it’s not going to benefit you to wait the 6 months before looking for another job. Use your funds sparingly, even during an emergency. Just remember how long it took you to save up that amount, and remember you will have to replenish it once you get back to work.

Thank you, Alan! Great article. The only thing I would add is that if you’re in debt, limit your emergency fund to $1000-$2000 and then work like mad to get out of debt before adding more to the emergency fund.

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