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Creating an Emergency Fund
Most people understanding the importance of having an emergency fund. However, very few have some sort of plan in case that emergency happens. Are you one of those who have one? If your answer is yes, congratulations on being financially responsible. If you don't have an emergency fund, you should consider is seriously. An emergency fund is the most important thing you can do to help your own financial health and your family.
It is not surprising that emergency fund is one of the most common advice you get from a financial professional. It is no secret that an emergency fund can provide much needed money in a family crisis. Most people understand it well but just don't have any money left to save for a financial emergency. Also, some people think that they have a stable job so possibility of personal financial crisis is remote. But the fact of the matter is that most people will suffer a major financial windfall at sometime in their life, such as a job loss, automobile repair or a major medical bill. It's only logical to save for such events. As much as we would like life to go perfect, it just does not happen. It's not being pessimistic to save for emergencies, it's just common sense. Further, if you consider alternative if you don't have 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. If you take out home equity loan, you're better off than a credit card, but you may not get it quickly and interest expenses are going to be considerable. So it makes perfect sense to put together some saving for a financial crisis.
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. Best selling author and financial counselor, Dave Ramsey, tells us that a person should save 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, and your life is just okay. You should lean closer to the 6 month 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 way to calculate the size of your emergency fund is to review your monthly budget. This will indicate how much liquid capital you may need to supplement your lifestyle in time of need. 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 stop. 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.
 First thing you need to do is get started. Too many people keep delaying their emergency fund planning because they don't have enough to start with. IT doesn't matter whether you want to start with $20 or $2000, open a saving account and put this money in. Worry about funding later, just get it started and you'll soon notice how you could find new ways to save and put money is your emergency fund.
Treat it like a regular bill. The number one reason why emergency fund is not funded is because it doesn't feel important on a daily on monthly basis. If you treat it like a monthly bill, it will be taken care of. If you fear that you may not have money left for it or you may forget funding it, you may even have it directly taken out of your paycheck and deposited to a saving account. In this way, you never see this money so you can't spend it on anything else.
Not enough money. this is the number one complain or excuse from most people for not having their emergency fund. What they don't realize is that they are spending money on things they could easily avoid and then defer those savings to their emergency fund. For example, if you smoke or drink, you may want to consider fixing your bad habit and redirecting savings to your emergency fund. If you eat out a lot, may be you want to skip couple of times a month and put the saving in emergency fund.
Shop Smart and Save. Shopping for groceries and regular household stuff is pretty much non-negotiable and you'll have to spend that money. However, have you ever compared prices from your favorite grocery store to other stores? You probably didn't think about it since isn't it the same brand everyone is selling so why would it cost more or less at different places? Technically it should but it reality it does. Here is an example. A couple of years ago a local newspaper compared weekly grocery list prices from 5 different grocery chains in Columbia, SC and results were shocking. For the same list with same brand items, range for the weekly bill was from $48 to $73. Now why in the world would you pay $73 for your groceries when you could get them for $73? Shopping at a different store saved $25/week in this example. That would translate to $1,300/year. Wouldn't that be a decent start for your emergency fund?
Shopping for Big Ticket Items. Your savings could be lot higher when you're purchasing a big ticket item such as a HDTV television or washer/dryer. Online retailers can offer you a better prices as compared to your local store due to lower overhead costs. What you should do is to go to your local store, check out different models and when you have decided to buy a particular one, go online and compare the prices. We offer a link to shopping.com price comparison engine that could save you lot of money every year.
Annual Bonus or Income Tax Refund. Most people make plans on how to spend this cash but very few think about emergency funds. Remember, your tax refund or bonus is in addition to your annual pay and you usually don't have any monthly expenses deferred for this check. So think about saving some of it for emergency fund before spending on that expensive vacation. If both partner work, this could add substantial funds in your emergency account.
 Investing your Emergency Fund
Once you begin saving money for emergencies, you need to consider what is the best investment vehicle for your saving. You want to make sure that you don't invest it in long terms securities since you may need it at a short notice. You also want to make sure that you don't invest it in risky investments such as stocks and bonds. we need a place to put it. You don't want to put it in dollar bills under your mattress either because you are losing purchasing power to inflation. A high-performing high-class money market account is the way to go. These are currently earning about 3% to 4% interest annually. When choosing a money market account, be sure to get one that has check writing privileges so that you can get access to your money when you need it. You can also consider a short term CD or Certificate of Deposit. You can choose one with 6-month maturity window and earn a easy 4% to 5%.
When you have your emergency fund in place, you feel more secure and confident about the financial emergencies that you could face. One important thing to remember is to keep these funds strictly for financial emergencies. Don't borrow from this fund for other temporary expenses such as vacation, a hitech TV or a nice sports car. Also, once you've used your emergency funds for a true emergency, don't loose the focus of this account and start funding it back as soon as possible.
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