Setting Up and Maintaining an Emergency Fund

Tweet

What is an emergency fund? It is basically money that has been set aside, that should be equivalent to 6 months of your salary, that is for the purpose of dealing with any 'emergency' situation that may arise that would require cash. That could be a sudden job loss, reduction in hours on the job, an expensive car repair, a furnace going out, or even a major medical expense. How do you fund an emergency fund? People should be setting aside at minimum, 10% of their income. I personally think that should be 20%. But the point is that saving anything is better than saving nothing at all. If you can only afford to save 5%, start with that. Is it 2%? Go with that. You can always gradually increase what you save. You should also have a goal and a plan to save more, especially if you are not at the minimum 10% or the recommended 20%. Treat it like any other bill you have. Pay yourself first is real. And it is something you should do. The amount you set to set aside should be a "non-negotiable" amount. Treat it like you would treat any other bill and pay it no matter what. Keep in mind that part of what you are doing here is establishing a habit. At some point, putting this money aside from each paycheck becomes a normal and natural thing to do, and after a while you have become accustomed to not having the money to spend on other things. How do you maintain an emergency fund and use the 'process of saving' to build more wealth? Luck says that eventually you will need to tap into some of these emergency funds. That's just the natural order of life, if you will. When the emergency fund is fully funded, you don't stop paying the bill. Instead, you put that savings amount into other things. Like the stock market or CDs or some other investment or savings vehicle. When the day comes that you have to draw funds from the emergency fund, you simply shift the bill payment back to the emergency fund to refill it. When the emergency fund is once again restored to 6 months worth of salary you can then refocus on putting the money back into your additional savings. In conclusion. The advantage of doing this is being prepared financially for whatever may come your way. It saves you from payday loans, credit card use, and other types of borrowing. It saves you from tapping into retirement plans like 401k's and IRA's. The most important advantage is simply building that habit I talked about earlier. Chances are you will also be thinking about money in a very different way, making dealing with all of the challenges money can present that much easier to deal with. Incidentally, done right, when an emergency fund has been depleted, provided you have continued to pay the bill, you may be able to simply take the money to refill it out of additional savings you created when you put the funds somewhere else when the fund was full.