Establishing an Emergency Fund

An emergency savings account is a safety net that can protect you when unexpected expenses arise. For example, your car may break down and need costly repairs. Or you may lose your job and have a period of unemployment before finding another.  An emergency fund is preferable to using credit for these types of financial issues because credit cards and loans create debt and can make your financial problems even worse.

The rule of thumb when it comes to establishing an emergency account is to aim for three to twelve months of living expenses. Of course, the more money you’ve got in your emergency account, the better. For most people building their emergency fund to where they want it takes awhile. The first step is to decide on a savings goal and figure out how much to put towards that goal each week or month. This can be achieved by examining your budget and evaluating the money available for savings.

If there isn’t any money available, you will need to cut expenses, increase income or both. Everyone should have a solid budget plan implemented, if you don’t already have one establish it now.

Your emergency savings should be kept in an account separate from your normal checking and savings accounts. This will make you less likely to take money out of the account for non-emergencies. If you think it will be difficult for you to put money in the fund regularly consider having it directly deposited from your paycheck. That way the money will be placed in the savings account before you even see it.

By depositing to your fund regularly you will eventually meet the goal you’ve set for yourself. Once you meet your original goal, consider raising it and saving even more.

As mentioned previously, an emergency fund is for just that — emergencies. You should only dip into the account when you absolutely must. This might include job loss, medical expenses your insurance policy doesn’t cover, a pending repossession of your vehicle, foreclosure on your home…you get the idea.

You should not use the money in your emergency savings account for merchandise or services that are not absolutely urgent and necessary. You may want a new designer handbag or car stereo system, for example, but the last thing you want to do is buy it with your emergency fund money.