Money Matters Monday: Establishing and Maintaining an Emergency Fund
Emergencies happen and generally they happen at the worst possible time like during the holidays or just before a family vacation. A key part of budgeting is making sure that you have an emergency fund to access in case you are hit by an unexpected event. It is not good enough to simply establish and fill an emergency fund; you should absolutely have a set of rules governing how to use your emergency fund. Below are the key rules and points to consider when establishing and maintaining an emergency fund:
As part of establishing your emergency fund it is important to determine how much you want to save and how you intend to get there. Many experts suggest that an emergency fund should be able to cover living expenses for 6-9 months if you were to become unemployed. This is where establishing a realistic budget (the Money Matters Monday from last week) will help you. Look at your budget for one month and determine how many months cushion you would want to have in case of job loss. Next decide how much money per pay period you can place in your emergency fund. Lastly divide your total emergency fund by the amount you plan to save per pay period. The result will be the number of deposits that will need to be made to fully fund your account. For example, I decide that I want to save $7000 but I can only deposit $200 every two weeks. This means it will take 35 deposits to save $7000 equaling approximately 18 months of time. The numbers may feel big but don’t get discouraged. If you are diligent about saving, you will have that safety net established before you know it.
One way to make the saving process a bit easier is to initiate automatic deposits from your paycheck to the separate account where your emergency fund will live. This will take the savings process out of your hands and ensure that you stay on schedule without having to remember to transfer or withdraw and redeposit the money. Ideally, the less you handle that money, the better off your account balance will be. On the same topic of accessing your fund, consider heavily restricting your ability to access the emergency money. You don’t want to be tempted to remove any amount of money, big or small, for non-emergency purposes. The harder it is to access the money, the less likely you are to access that money for inappropriate purposes. Some ways to achieve this are to not have a debit card linked to the account or set up an online account where you can only access the funds by transferring them to your primary bank which will generally have a lag time of 3-5 business days.
At some juncture, you will need to access your emergency fund so setting up rules and parameters around the decision process is important. For example, if you were to lose your job for an extended period of time, you would want to access your money only for necessities such as housing, food, and other basics in order to make it last as long as your unemployment status. You should always consider other sources of money before accessing your emergency fund. If you are continually accessing these funds for non-emergency purposes, the money won’t be there when you truly need it. Asking yourself whether the situation warrants use of emergency funds is a key part of making the honest decision of whether or not to access your emergency account.
If you end up using part or all of your emergency funds during an honest-to-goodness emergency time in your life, it is critical to put a plan in place to stock your fund again once you are in a position to do so. It is very easy to forego replacing emergency funds especially if you are coming off a particularly trying period. Perhaps you feel entitled to “splurge” because you had to sacrifice during our emergency. Going out for an ice cream or a movie is a great way to reward yourself rather than spending inordinate amounts of money on material items. Remember the sense of security that having a fully stocked emergency fund provided before you consider leaving that account empty for too long.
In summary, establish your emergency fund with your realistic budget in mind, set up your account and savings plan in a way to ensure success, set up rules regarding accessing your funds and put a plan in place to replace any money removed from your emergency account as soon as possible. The presence of an emergency fund will allow you to focus on your emergency situation instead of worrying about providing the basic necessities for you and your family. In that way, an emergency fund is worth more than the dollars in the bank account because it can provide you with peace of mind.
Did you miss any of the other Money Matters Monday articles? You can see them here. Plus, check out my Party Page to see where I am linking up at!