Setting up an Emergency Fund

Everyone should have emergency funds; some sort of money that is tucked away so that if anything happens, you can tap into that fund and cover what you need to cover, instead of going into debt. What happens if your roof caves in? If you have money saved away, you can get it fixed. If you don’t, well, then you’re in for a bit of a problem. Here’s how I suggest you go about setting up an emergency fund so that it does the most for you.

Start a savings account. But, unlike a savings account where you may be saving for a vacation or something and can dip in whenever and wherever, do not ever touch this fund. When you make a budget, add $20 or $100 or any amount every single month to the savings account. If you add the same amount of money every single month, what you’re going to find is that you’re slowly building up your emergency funds. If you do the $100 route, at the end of a year, you have $1200 saved that is accruing interest. If both you and your partner each do it, that’s $2400.

One day, suddenly, your roof caves in, or your car breaks down, or you have a hospital payment, or ______ (fill in the blank). Because you were diligent in setting up an emergency fund, you saved up enough in your bank account to cover that bill. You take out what you need and pay for it in cash, bada bing, bada boom, and you’re done. Rather than having to use a credit card and get in the risk of debt, you had cash to cover your repairs. That is what emergency funds are for and that’s why it’s so important to make one. It’s not hard and if you do it right and learn how to make a budget to include it, you won’t be hurting for money because you’ll get used to having $100 or $200 less a month.

But, make sure you balance building up your emergency fund, with reducing your debt. You don’t want your credit card interest rates causing you to have more debt, just because you’re saving up money. Most people suggest that you build up an emergency fund of about 3 to 6 months worth of expenses. Others suggest $1000-1500. You need to analyze your specific debt situation and ability to build up an emergency fund. But, make sure you build up that fund, because when you do have an emergency, you won’t have to go into more debt.