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Building An Emergency Fund

Hope for the best, but plan for the worst! 

This old adage can apply to almost any type of planning, even to life in general, but it has special relevance when it comes to your finances.

According to a December 2015 survey conducted by MagnifyMoney.com, 56.3% of Americans have less than $1000 in savings.  For this majority, this offers virtually no protection from even a relatively minor emergency. While living paycheck-to-paycheck is a worrying reality for many due to a variety of circumstances, for some it could have been their lack of an emergency fund that precipitated this stressful situation.   The good news is that building an emergency fund isn’t as hard you might think, no matter your current financial state.  Regardless of how much you start it with or add to it each time, the mere exercise of doing so consistently will both boost your confidence and relieve your stress over how to handle life’s little emergencies that come up unexpectedly.

What is an emergency fund?

A true emergency fund is a readily accessible fund, often a savings account, designed to help you absorb unexpected and extraordinary expenses such as needed car repairs, insurance deductibles, even a lost cell phone.  Other more serious things an emergency fund can help cover are medical bills or even a job loss.  It should never be used as a replacement for your retirement fund or your child’s college education fund; these should be created, planned, and saved for separately.  Most importantly, in order for it to live up to its name, an emergency fund should only be use for “needs” and never for “wants.”  Dipping into it for non-essentials can weaken its stated purpose of being there for you in your times of need.

Where to begin? 

Start with a plan!  An old rule of thumb was that you should have enough money set aside to cover three to six months of living expenses, and while you may want to be even more aggressive if you have the means and opportunity, this is still a good recommendation to follow. Begin by determining your current living expense essential, making sure to include housing, debt payments and insurance.

How to get there?

One easy way is to start an automatic savings plan at your bank. Simply instruct them to transfer a specific amount from your checking account to a savings account each week or month. If your employer offers direct deposit, chances are you can also make a similar type request to your human resources department to have an amount automatically deducted from your paycheck and deposited into the savings account. While it may not seem like much, as little as $25 per week or $50 every two will get you started and add up faster than you might think. Not only is an automatic savings plan a great way to develop the habit of saving. Over time, you will come to view that amount as a regular "expense" and may not even notice it is “gone.”

Another way to boost your fund is to add your change and any unexpected cash to it. Keep a “rainy day” jar at home and anytime you have loose change or cash that turns up in the cushions, old purses, coat pockets, and even the washer or dryer, add it to your jar.  As your jar fills, take it to your bank to be added to your account, it’s just like finding it! 

Other ideas include giving it a proverbial shot in the arm at tax time.  If you receive a tax refund from your state or the IRS, be sure to add some or even all of it to your emergency fund if possible to help it grow more quickly. Or deposit your proceeds from a special yard or garage sale, or even use an online auction site to sell items you no longer want or need to help you clean out and clean up! 

In addition, there is always the option of cutting costs by reducing or even cancelling services you can live without for a period of time. Look at your expenses and see what you can give up for a while, just be sure to add and of these savings to your fund.  Lastly, if you’re really serious about building up your emergency fund quickly, you may want to consider adding a seasonal or part-time job just for this purpose. 

In summary, whatever approach or combination of approaches you take to help you get your emergency fund going, the first step is to get it started, and the sooner the better. The next, and often the hardest ones are to stick with it and stay out of it…until the unexpected happens.  This way you will have planned for the worst, and can hope for the best:  if you don't end up needing it, you’ll be on your way to accumulating some wealth and a little more financial peace of mind!