Financial Plan to Implement Now: Emergency Fund

August 15, 2008 By Tisha (Kulak) Tolar

Most consumers at some point in their lives have managed to save money for a tangible reason, such as a down payment on a house, a car, a new television, or even a great vacation. But most fail to realize the importance of saving for no reason in particular. That is what an emergency fund is for and you definitely need one.

There are just too many uncertainties in life that can through a wrench in your finances in a quick minute. Your car breaks down and you can not get to work; you lose your job unexpectedly; you break your leg and can’t go back to work in construction. Establishing an emergency fund will take care of those little curveballs life is prone to throwing.

Many people understand the concept of saving but fail to understand how to get the ball rolling. So let’s break down what should constitute your emergency fund.

How Much Money

You must figure out how much money to work towards for establishing an emergency fund. To do that, you need to take your current income, added to your spouse if applicable, and multiply by the number of months you could be out of work at any one time. Say you make $2,000 a month and figure that you need to prepare for an 8 month leave of work. Your emergency fund will need to maintain $16,000.

Establishing the Fund

It won’t be easy or quick to save $16,000 so you will need to plan how to add money consistently and without stress to your budget. A good way to begin saving is to calculate the amount of one month’s worth of your income and make it your goal to save that much each year, roughly 8% of your income on a monthly basis. Whenever your income increases, your savings will in turn increase and you will be on your way to saving more money towards your goal each year. Anytime you get “extra” money, such as from a bonus, inheritance, income tax refund, or monetary gifts, put it directly into your account.

Holding the Money

Essentially you need to consider the amount you are to save each month as another bill that needs to be paid. Add it into your budget and make a commitment to paying it in full each month. It is advisable that you open an account for the money and not just keep the cash in your freezer. You may want to consider a money market account that pays a good interest rate and one that invests in tax-free securities so you do not end up paying taxes on any interest. A savings account is also an option but you may not earn as much interest. It is also advisable that you open an account with a bank that you do not already use to help avoid the temptation of touching. Set up a direct deposit from your paycheck or an automatic withdrawal from your checking account for each month instead of waiting to see how much money is left over. That method will never get you anywhere.

Posted in banking, emergencies, lifestyle, making money, personal behavior, personal finance, saving money, savings

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