The Importance of Starting an Emergency Fund
Life rarely goes as planned. From those unexpected vehicle repairs that seem to hit you at the worst possible time, to the recent unemployment surge that’s hit this country, there seems to be a never-ending supply of financial turmoil. When things go bad financially, it can sometimes feel like the end of the world for those who are in middle of the crisis.
But just like every other area of preparedness, there are steps you can take to prepare yourself for the chaos; when it comes to preparing for economic troubles, the best possible step you can take is to establish an emergency fund.
What Is an Emergency Fund?
An emergency fund is exactly what it sounds like; it’s a reserve of money that is set aside to insulate you from financial troubles. Sadly that seems to be a foreign concept for most people in this country, especially those in government.
Our country sits at over 16 trillion dollars in debt, and the American public owes somewhere around 11.28 trillion in debt. That means the average citizen owes over $15,000 in credit card debt, almost $150,000 in mortgage related debt, and an average of $33,000 in student loan debt. One look at those numbers shows how much trouble we’re in as a nation; it also shows how unprepared most people are to deal with a financial emergency.
The subject of financial preparedness is something that we could never cover in a single article, but we do want to look at what you can do to prepare yourself for some of life’s most common problems.
Three Types of Emergency Funds
In the context of this article we are going to talk about three types of emergency funds. They are meant to help prepare you for those unexpected events in life: a job loss, an unexpected pregnancy, a short-term disaster, a vehicle repair, and so on.
Your Emergency funds should be split into three main categories:
- Cash-on-Hand Fund: This is a fund that is used to prepare for things like natural disasters, power grid failures or events where you have to evacuate your area. In my opinion, it’s a fund that should be kept out of the banks where you can immediately access it during an emergency. It can be used to pay for things like supplies, fuel, hotel rooms, etc…
- Short-term Fund: Your short-term fund is the fund that you go to when you have an immediate emergency. It can be used to pay for smaller emergencies, like an unexpected vehicle repair or replacing a major appliance that has broken. This should be kept at a local bank, and have a debit card attached to the account so you can immediately access your money. Short-term funds can also be used to get you through larger events where it may take a couple of days to access your long-term emergency fund.
- Long-term fund: This is a reserve of money that can get you through long-term difficulties like a job loss, or get you back on your feet after something like a major natural disaster. While this fund should be able to be accessed quickly, it shouldn’t be so easily accessible that you’ll be tempted use it for everyday spending.
The most important thing to remember is our funds are for emergencies; we don’t use these accounts to pay for vacations, fancy new cars or going out to eat. At some point, we are all going to be faced with some sort of crisis that requires us to spend beyond what we planned; when that time comes, having an emergency fund might be the best emergency preparation you ever made.
How Big Should Your Emergency Fund Be?
In the past, experts usually recommended having a 3 – 6 month in your long-term emergency fund. Based on the financial turmoil this country has been through over the last couple of years, I think that number needs to be much higher.
If you look at unemployment trends alone, you’ll see that the average time it takes to be rehired has skyrocketed during the last couple of years. That means your 3 – 6 month fund, while still being better than nothing, might not be enough to get you through these new troubling economic times.
While putting that much money aside in this economy can seem daunting, remember it doesn’t have to be done immediately. Rome wasn’t built in a day, and I doubt your emergency fund will be either. The important thing is doing something; even putting an extra $10 a week into your emergency fund will give you over $500 in a year. While that might not seem like a lot, it sure will be nice to have it if something happens.
Building Your Emergency Fund
A lot of people get discouraged when they can’t immediately put aside enough money to feel secure, but you must remember that even a couple of dollars a day can make a big difference over time.
If you’re still anxious and want to kick your emergency fund into overdrive, here are a couple of suggestions to get you started.
- Stop wasting Money: Have you ever sat down and really looked at what you spend? Most people don’t realize how much they spend on useless crap that does nothing to add to their quality of life. From that $5 cup of coffee, to those who are for some reason still paying for products that are literally killing them, you’ll be amazed how much money you can save by cutting down on non-essential items
- Sell your Junk: From eBay and Craigslist, to the good old fashion garage sale, most of us have loads of old junk that we can sell.
- Learn from what you Sold: Hopefully you made a lot of money from selling your old unused junk; hopefully you also learned a lesson here that will be with you next time you are tempted by one of those impulse buys. Yes you made some money selling that old junk, but how much did you lose by buying that product to begin with?
- Cut Down: Cable, gym memberships and cell phone contracts should all be evaluated to see if they can be lowered, or even cut out altogether. It’s all about priorities; when the next crisis hits, are those Cable T.V. shows you’re paying for going to help pay the bills?