How To Build An Emergency Fund

Current Economic Climate Demands Strong Emergency Fund!

I think at some level we all understand the need to save money for emergencies and rainy days. However, most of us, including myself think about paying bills first and then saving what is left over, which in most cases is usually little to nothing. Thus, it is no surprise that most Americans today have hardly any savings.

The article “Death Of Good Money Saving Habits” discusses some of the reasons why saving activity ans levels have deteriorated over the last fifty years or so.

No Easy Way Out

So the question is how do you start to save money to build an emergency fund and if you are already saving some money, how can you save more? Well, unfortunately, there is no magic pixie dust that you can sprinkle that would yield more savings. Instead, what you need is to evaluate your current financial status, set a savings goal, and then take consistent action to meet your goal.

My Bone-Head Idea For An Emergency Fund

Currently, I have little or no savings. My idea of an emergency fund was to have a $20,000 credit that would see me through minor personal cashflow problems. Well, I for one had no idea just how gory this credit crisis would turn out. The scary part is that it is far from over. Anyway, so when I did have cashflow issues, my ever-ready $20K credit card sprang into action and kept me going unperturbed for about 6 months.

However, my situation did not change and now I have an additional $20K in toxic debt. My backup credit card, for $15K was promptly canceled by the creditor and I was in a situation where I had no income or money for emergencies. This whole scenario could have been avoided and I could have bought much more time to resolve my situation if only I had some of own savings on which to draw.

My New, Workable Idea For An Emergency Fund

My plan is to save 5% of my pretax income into a cash reserve account that I have setup. This account is strictly for emergencies. It is not a retirement account which I will cove r in another article.

5% means that I have to find a way to save $200 each month. A lot of so-called financial gurus come up with number as how much money you should have saved. Some say 6 months, some 8 months and some even 12 months or more. I say, you should decide for yourself given the financial situation in front of you.

Everybody has different needs and circumstances are different for each person. For me, I feel that I need 6 months worth of savings, based on my current and projected expenses and based on my past experience with my “emergency credit card”.

Establish A Savings Mindset

Of course, saving $200 per month will mean that it will take me 10 years to save $24,000 which for me is my monthly expense. 10 years!

Ten years just seems like a ridiculously long time to build up an emergency fund. I can either blow it off and say the heck with savings because it just isn’t going to work for me or I can make a start with $200 per month and figure out ways I can increase my savings rate so that I reach my goal quicker. I know of many people that just wouldn’t start saving because they feel like they will never reach their goal.

Time is not going to wait for anybody, it simply marches on. In other words, in ten years you can have your $24K, or whatever the amount is for you, or you can be broke just like you are today, It’s your choice. Your thoughts and actions will determine your outcomes and results, so it is important to have the correct mindset and way of thinking here.

My Personal Plan

Here is what I have decided. 10 years is just too long, even for me. So I’m going to aim for 3 month emergency fund which would be $12,000. At $200 per month, I’m looking at 5 years to accomplish my goal. This now seems more do-able.

So I will start with $200 per month starting next month and then figure out a way how I can increase my savings rate so that I can accomplish my goal even quicker. But that is the second step. The first, and the most crucial step is to get started immediately with saving some money. In my case it’s $200 per month.

In part 2 of this article (Funding An Emergency Fund) I will discuss how I will “free” up $200 from my monthly income so that I can save it. Stay tuned, and in the meantime, evaluate your needs, set your savings goal and get started today! Trust me it’ll be worth it.

Other Articles You May Be Interested In:

1. Funding an Emergency Fund