It’s An Emergency!
An emergency fund is a key component of any sound financial plan. The huge barrier for most people is how intimidating the process of saving up six months’ worth of essential expenses has been. Six months’ worth? In a savings account? OMG!
I’ve been battling The Easy Way Out solution most financial institutions offer: the line of credit emergency fund. Bah! How is going into debt on a line of credit during an emergency a sensible solution? It’s not. It’s the excuse people use for not saving! Plain and simple, it’s the lazy man’s solution. And it’s expensive, soul stealing and bad planning (or would that be “no planning?”)
People who don’t see the point in having an emergency fund are either really, really short-sighted, or completely unwilling to stop spending all their money. They are so averse to taking a little bit of what they are blowing on crap and setting it aside that they’re willing to brave the terrors of an emergency (and it’s only a matter of time) without any kind of safety net.
How good would it feel to not have to panic when the car breaks down and you need to come up with an unpredictable $2400? How much safer would you feel if your baby, your mom, your partner gets sick and you must take time off work (without pay) to see to their needs? How much smarter would you feel if you got laid off from work and had enough money set aside to keep a roof over your head and food in your belly until you could get another job?
An emergency fund is CASH you’ve accumulated so that you can you have the money you need to keep things in balance when the crap hits the fan. Most of the time, it just sits there earning a pittance in interest, waiting to be called into active duty when The Worst happens.
Some people have a problem with the concept of the money just sitting there. Once they’ve built up a couple of thousand dollars, they start thinking of that money as spendable. The vacation becomes a “sanity emergency.” The replacement windows become a “home emergency.” They run up their credit cards and that becomes a “debt emergency.” They find a way to rationalize spending the money because the idea of having that money sitting there is so foreign to them.
People, anything you can predict having to spend money on should be a line item on your budget and become a planned spending category. Vacations, new windows and whatever you blew money on your credit card to buy are all predicable expenses. Even on-going vehicle maintenance is a predictable expense. It only becomes an emergency when the cost exceeds what you’ve managed to accumulate.
When you add up what it costs to keep your family going for six months, you might be intimidated by the amount you have to accumulate in your emergency fund. Six months of essential emergency expenses can be an enormous goal. So start small. Make your initial goal $500. Once you reach that benchmark, set your next goal.
Make your savings automatic. If you decide to save $100 a month, have that amount auto-debited from your main banking account to your high interest savings account every month. You’ll get used to living without that money in no time flat.
So where are you going to find $100 a month? You might be surprised if you just put a little thought into it. If you’ve got car and home insurance, combining the two with the same insurance company could save you up to 20% on your policy. Better yet, shop your policies around to see if another company is prepared to give you a better deal.
Cut $25 a week out of your grocery budget, do some meal planning, shop with a list, and watch your emergency fund grow instead of your thighs.
Swap eating out for a fancy dinner at home and you’ll not only save money, you’ll learn to be a better cook. Invite friends for a pot-luck, and watch the evening turn into a night of laughter and games.
Combine your errands, car-pool with a co-worker, or hop on your bike and bank what you save for an emergency.
Go over your monthly auto deductions and see what you can trim or eliminate completely. Do you really watch that much TV that you’re willing to drop $100 a month on satellite or cable? Cut it in half and you’re half-way home to monthly emergency fund amount. Ditto your cell phone, long-distance bill, gym membership, and anything else you buy routinely that you’re now taking for granted.
The key is to actually save whatever it is you’re “saving.” Leaving it where you can spend it on coffee or a new sweater is self-defeating. Moving it somewhere you can’t touch it means it’ll be there when you REALLY need it.