How to Create an Emergency Fund for Your Family
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By :
Ed McDonald
Submitted
2010-01-23 16:45:57 |
It is not surprising that topic of emergency fund is one of the most talked about subjects when it comes to budget planning and setting up financial goals. It is no secret that an emergency fund can provide much needed money in time of need during a family financial crisis. While most people understand the importance of having a emergency fund, majority of them think that they just don't have any money left to save for a financial emergency. Also, some people think that a possibility of personal financial crisis is remote in their lives.
Real life industry data suggests otherwise. Financial data collected over the years indicates that most people will suffer some kind of financial windfall at some point in their lives, such as a job loss, automobile repair or a major medical bill. Since the probability is high, it's only logical to save for such events. As much as we would like life to go perfectly, it just does not happen. It's not being pessimistic to think and save for emergencies, it's just common sense.
Further, if you consider alternatives to an emergency fund, you would realize why having an emergency fund is co critical. For example, If you don't have an emergency fund, the most likely place you would go to get cash in emergency is either a credit card or a personal loan. Both of these are unsecured debt and could cause you thousands of dollars in interest and finance charges. On top of all the financial burden, there is no guarantee that you will get approved for such a loan. In the past, people have also relied on the home equity loans. While you're better off as compared to a credit card advance, you may not get it quickly and interest expenses are going to be considerable as well. Also, with recent downturn in housing market, it is possible that you may not have left any equity in your home to start with.
If you're ready to take this issue seriously, next natural question would be - How much do I really need to save for financial emergencies? Answer to this question will depend on your personal financial situation.
How Much Do I Need For My Emergency Fund?
Best selling author and financial counselor, Dave Ramsey, tells us that a person should save for about 3 to 6 months of expenses. You can save closer to three months if you and your wife are both working, have stable jobs, no major medical problems. You should lean closer to the 6 months mark if you are the sole income provider for the family or if you have a history of medical issues or any other reason that might cause a large financially crisis unexpectedly.
One of the best ways to calculate the size of your emergency fund is to review your monthly budget. This will clearly show you how much liquid capital you may need to supplement your lifestyle in financial crisis. Here is an example of a simple monthly budget template.Monthly Budget Worksheet |
Mortgage/Rent Payment |
$ | Health Care and Insurance | $ | | Food and Apparels | $ | College Fund and IRA payments | $ |
| Utility Expenses(Gas/Electric/Water) | $ | Entertainment and Charity | $ |
| Auto Loan Payments and Gas | $ | Non Monthly Payments(Taxes etc) | $ | | Education and Childcare Expenses | $ |
Miscellaneous | $ |
This is a very simple worksheet and you may want to update it to suit your individual needs. Bottom line is to figure out your monthly expenses that you can't live without. Once you've figured out the monthly expenses, you would want to create an emergency fund that could last at least up to four months. So if your bare minimum monthly expense is $2,500, you would want to put aside $10,000 in emergency funds.
Next challenge is how to come up with this money. Most people are on a tight budget and don't have much money left once expenses are accounted for. There is no right or wrong way of saving for your emergency fund but here are some money saving strategies that could help.
How to Save For Emergency Fund
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Article From Fiscalwealth | Personal Finances, Investment and Wealth Management
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