Why have an emergency fund
A very common question that keep’s popping up when talking to people about finances is “How much money should I set aside for emergencies”? This question has many variable answers but when I did my research most financial advisers suggested to start with a goal of three months. But the ultimate goal would be to have six months of income set aside in an interest bearing account.
Setting up an emergency fund
I would shoot for the six month goal in order to give yourself a good cushion to fall back on if an emergency arises. Back about twelve years ago I was laid off work without any warning sign or knowledge of it coming. I was out of work for six months but thankfully I had six months of income set aside, if I did not have this cushion I and my family may have ended up on the street without a roof over our heads.
Back in 2008 during the great meltdown of the economy many people were without work for long periods of time. With the economy today and the unstable governments in other countries the American economy is very fragile. At any given moment we could have something major happen here in the United States and our money system could have a major collapse and people would be out of work and have no income. Having a nice financial cushion of money set aside makes life a lot easier and less stressful if you find yourself like me out of work for any given period of time.
The truth is that anything could happen to anyone of us at any given moment. We could find out that we have some major illness, or we get into a car accident, your spouse dies out of the blue, etc. One just never knows what may happen at the blink of an eye. We are not guaranteed our next breath. My best advice is, be prepared and if you are not then make it a goal to get yourself prepared.
Let’s look at how we can get this started.
You first need to know what your bills are. You need to take some time and sit down and write out what your fixed monthly bills are, this way you will know what your fixed expenses are. Now figure out what your variable expenses (gas, groceries, entertainment, etc.) are.
Once you know what your total expense picture is you can then determine how much money you will need to save. Take all your expenses and multiply by three for three months emergency fund or six for a six month emergency fund.
To set up emergency account correctly do not try and save the money in your checking account. I have tried this and if it is sitting where it can be seen you will spend it, trust me. Set up another account preferably with another financial institution like a credit union and make sure it is an interest bearing account.
It takes discipline
Be extremely disciplined to get this account filled up, this is a very important fund and needs to be handled as a do not touch me account. Only draw money out of this account for emergencies only. You can decide what you call an emergency; some examples would be car repairs, hospital bills, money to live on if you or your spouse loses their job, things like this. Not vacations or money for a down payment on a new car.
No one expects to lose their job, I didn’t twelve years ago, but things happen. That is why it is wise to have this emergency fund set up and the fund filled as soon as possible. It is better to be prepared then to be caught with empty handed and you and your family be caught in a financial disaster. But if you do have an emergency and you have an emergency fund set up then you can sleep at night soundly if you are prepared.