Emergency Fund: Why You Need this 5 Step Savings Plan

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We’ve all been there in some fashion: having to put a big unexpected expense on the credit card because we didn’t have an emergency fund.

emergency fundYou go in for your state inspection and you find out that your car needs new tires.

You wake up one morning to find out the toilet in your guest bathroom fell through the ceiling and is now in your living room. (This actually happened to my parents’ place at the Jersey shore.  Luckily, they weren’t there at the time and a contractor let them know).

Your little one gets sick and you have a high deductible. You take him to the emergency room and thank God he’s alright.  But, hooray!  We have more bills to pay!  Emergency room visits aren’t cheap.

The point is life happens. Expenses sneak up on you here and there.

If you’re like many people out there, you’re likely not prepared for them.

So, what do you do? You put them on your credit card.  That’s what everybody does, right?  Not exactly.  The Credit Card Catastrophe might be a reality for those in your inner circle, but there are actually people out there who are prepared for life’s emergencies.

What do you mean, Dave? Well, many people have what is called an Emergency Fund.  It’s a pot of money set aside for expenses that pop up that we’re not budgeted for.  That’s why they’re deemed emergencies.  And understand that this is separate from savings and investments.

Here’s the thing. You don’t have to be one of those people suffering from the Credit Card Catastrophe any longer.  You too can have an Emergency Fund Preparedness Strategy in your arsenal.

Allow me to show you how.

Step #1 – The Starting Line

First off, you can do this. Don’t put any pressure on yourself.  You will enjoy this process and it will take so much stress off of you and your family.

You need to understand that we are doing the Emergency Fund prior to paying off your debt. It’s important to get yourself away from your reliance on credit cards for when problems arise.  Having your Emergency Fund in place will prevent you from doing that.

So, decide how much you are going to save. I recommend somewhere between $500 and $1,500.  Use it as a guide depending on your income.  It’s a great thing to have an extra $500 lying around in the event of any unforeseen expenses that occur.

Now, take action. Get it in your head that you’re doing this and you can do this.  Then, decide on your Emergency Fund Amount.

Step #2 – You’re Off and Running

Alright, you’re at Step 2. So, I’m going with that assumption that you’re committed to this.  You’re ready to set up your Emergency Fund Preparedness Strategy.

Here are a few things to consider at this point:

  • Are you keeping to the budget you prepared? (If you don’t have a budget, read this post right now before continuing).
  • Do you have debt?
  • What are your spending habits?
  • What do you do with windfall money?
  • Is your family on board?

Why am I asking you these questions? For two reasons.  One, you need to assess your situation.  You need to know where you are right this moment.  Two, you need to develop a concrete plan.  You need to know where this Emergency Fund Journey is going to take you.

Once you answer the above questions, you will have a solid assessment of your current situation. So, do that as soon as you can.  If you have a significant other, get them on board.  If you have little ones that are old enough to understand basic financial matters, now is a great teachable moment.

But, what about where you’re going? We’ll address that in Step #3.

Step #3: Your Emergency Fund Preparedness Strategy

Why are you doing this? Don’t say because I told you to.

Seriously, why? Is there a reason you and your family want an Emergency Fund?  You don’t have to share it.  You can if you want to.  However, I know it’s a private matter.

You should be having these discussions. Talk with your significant other, your parents, or with a trusted friend or confidant.

Now, what’s the plan? How are you going to save this $500 to $1,500?

To get you started, consider these tips:

  • Reanalyze your budget. Are there other items you can reduce or cut altogether?
  • Get a second job. Do something on your nights and/or weekends.
  • Have a liquidation sale. You see businesses do this to get rid of inventory.  Sell things you don’t use.  Like that treadmill in pieces in your basement.  Like the baseball card collection you never look at.  Have a yard sale.  There are plenty of things you can find around your house to sell and help you to your goal.
  • Find good savings rates. Check your local bank or credit union.  Check banks and credit unions online.  Do they have rates for savings and/or checking accounts that are favorable?  That is where you want to put your Emergency Fund to allow it have at least some interest earnings.
  • Use coupons and/or apps that pay you. We all need to eat, so you use coupons when you shop for groceries.  Look into apps like Ebates that pay you.  It may not be much, but every little bit helps.

Step #4: Pay Yourself First

If you’re serious about getting this Emergency Fund together, you need to pay yourself first.

What does that mean?

Well, you should make a line item in your budget for the Emergency Fund.  Set aside a certain amount each month, but try to get the money together as quickly as possible.  Say, 1 to 3 months.

Do what was explained earlier: cut expenses, sell stuff, and/or get another job.  The Emergency Fund is the goal, so do what you have to in order to achieve it.  Everything with the exception illegal acts or selling your first born should be explored!

Step #5: Adjust and Re-Focus Your Efforts

By this point, you should understand the process of saving up an Emergency Fund and getting your Preparedness Strategy in place.  It’s time to check in and see how it’s going.

Consider this question: Are you hitting it out of the park or hitting a wall?  

If you’re hitting your monthly goals or already saved your Emergency Fund, it’s time to celebrate.  At this point, just keep going and making it rain!

On the other hand, if you’re struggling, you may need to extend the timeline.  That’s ok too.  The important thing is you’re honest because nobody is hurt by this but you and your family.

Conclusion

At the end of the day, you should be commended for taking big leap toward your financial fitness.  Your sacrifice and commitment to your Emergency Fund Preparedness Strategy will pay dividends to your future.  Remember to decide on the amount of your emergency fund, assess your situation, develop a concrete plan, pay yourself first, and adjust course as needed.  Stay focused, keep your eye on your why, and you will be thanking yourself in no time.

Do you have an emergency fund?  If not, what is preventing your from starting an emergency fund?  Please share your experiences and thoughts with us below.

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