Build An Emergency Fund You Can Be Proud Of

What would you do if you lost your job tomorrow? Would you have enough money in the bank to pay your bills while you search for new employment? Or would you have to start swiping your credit cards to pay for things like groceries and other household bills?

Building an emergency fund is one of the most important things you can do to prevent yourself from becoming in serious financial trouble. Emergencies do and WILL happen in your life and you need to be prepared for them. People often rely on credit cards for emergencies, but the problem with this approach is that those credit card bills don’t often get paid back right away, leaving you with interest payments on top of the actual bill. Wouldn’t you feel much better paying cash when an emergency arises and not having to worry about any interest costs?

There are many things your emergency fund could be used toward including:
- Loss Of Employment
- Death In The Family
- Major Car Repair
- Natural Distaster (flood, fire)
- Unexpected Dental Work
- Critical Home Repairs (roof, electrical)

How do I go about starting an emergency fund?
The first thing you need to figure out when you start building your emergency fund is where you want to put that money. It should be in a high-interest savings account that is easily accesible but not TOO easily accesible, if you know what I’m sayin’.

Richard and I have our emergency fund in an ING Direct Investment Savings Account (ISA), which has zero fees and gives us 1.50% in interest every year. Our emergency fund sits at a comfortable $15,000 (6 months worth of living expenses) so over the course of 1 year, we earn $225 in interest. That’s $225 in FREE money! After that first year, we we will have $15,225 and will make $228.38 in interest the next year. Awesome! (If you’re interested in setting up an ISA with ING Direct, please send me an email. I will send you a referral and we will both earn a $13 bonus! FREE MONEY, yes please!)

How much money should I have stashed away?
Honestly, this really depends on your personal situation. Are you single? Do you have kids? Pets? Do you live with roomates? This all factors in to how much money you should be saving.

I personally think that it’s best to have an emergency fund with 3-6 months worth of living expenses saved in case of an emergency. If your family lives on one income, I would suggest 6-12 months. You need to sit down and figure out how much your monthly expenses are (removing anything that is not absolutely necessary) – I would add a nice little buffer amount as well, just to be safe. So if your monthly living expenses are $3250, I would bump that up to $3300. When an emergency does come up, you’ll be happy to know you have that extra $50 every month for unexpencted expenses.

5 Ways To Start Building Your Emergency Fund – Easily!
1. Start Small – Start with an initial goal of $1,000 in the bank for emergencies. If you can’t afford to save much every month, that’s okay. The important thing is to save SOMETHING. Even a savings of $50 a month, will get you $600 by the end of the year, not including what you earn in interest. Once your financial situation starts to improve, you can save more every month. When you finally hit that $1,000 target, you can evalutate whether that amount makes you feel comfortable or if you should aim to save more.

2. Treat It Like Bill Pay – Have you ever heard the line “pay yourself first”? This is a good time to implement that advice. By treating your emergency fund savings amount as a monthly bill, you are more likely to put the money away instead of spending it.

3. Automate – Set up your online banking account to deduct a certain amount of money every month (or week, or whatever you prefer) and put it into your emergency fund. By doing this, you don’t even have to worry about transfering money – the bank will do the work for you!

4. Stash A Tax Refund or Bonus – If you’re fortunate enough to get bonuses at work, don’t blow all of it on WANTS. Put all (or most of) the money into your emergency fund. You will feel much better knowing that you have money set aside in case of emergency than you will by purchasing a new outfit or some random gadget. This same thing applies to tax refunds as well!

5. Sell Something Almost everyone has something in their home that they could do without. Whether it’s a toy your kids no longer play with, a guitar you have no desire to learn how to play or even a car that you don’t really NEED – sell it and put that money into your emergency fund.