What People Need To Know About Creating an Emergency Fund

Author: Chris Boulanger

When people are faced with an unexpected financial problem (medical bills, home repairs) and need more money, they might start borrowing or using their credit cards more to get through the rough patch.  This borrowing increases your debt and often prolongs your financial problems because of interest payments.  This situation is common and is becoming more common as people find themselves unemployed or under-employed. Creating an emergency fund helps people face the unexpected without begging, borrowing or destabilizing their person finances. To create an emergency fund, you need to set up a goal and start saving.
Finance experts say that 10 to 20 percent of monthly income is an ideal amount to save. But these amounts may not be feasible for you at this time. It's true that the more you save, the faster your fund will grow; but if you try to save more than you can really afford then you will end up giving up on the whole idea or siphoning off money for non-emergencies. Start with 5% of monthly income and be diligent about setting that amount aside each month. You can always increase the savings amount, but this way you will be able to start saving without feeling like you are denying yourself.


Getting Setup


There are 3 main things you need to do before you can start building your emergency fund:
First, you need to figure out where the savings is going to come from. Ideally, you have some discretionary (left over) money after  you have paid your bills. This is where you want the savings to come from. If you don't have any money left after paying bills, then you will need to cut expenses.  Start by calculating all the expenses you have in a three to six month period. Look for anything that is inessential or obsolete.
Maybe you are a NetFlix subscriber, but haven't watched a movie in 6 months? Or, maybe you buy your Venti coffee from Starbucks every morning but only drink half of it. With the NetFlix example, you can cut that subscription and immediately have money to save. With the Starbucks example, you can probably save 2-3 dollars a day, by getting a smaller size. Keep looking for these savings until you have a decent amount of the savings accounted for. A good place to look for savings is in your cable and cell phone plans. Do you really need all the premium channels? Have you ever sent 1000 text messages in month? If no, then you can save 10-20 dollars per month right there.
You should also look at little extras that you might have forgotten about. Do you always buy your makeup from the designer counter at the department store? Do you keep ordering personalized address labels but you never send cards or letters? These things seem so inconsequential that you don't realize how much they are costing you.

The point is to cutoff unnecessary spending so that you can have enough to use over the month and still build your emergency fund. Be honest about what you spend money on and also about why you spend it.
The second thing you need to do is figure out how you are going to save.  Will you have the money go straight from your paycheck to a savings account? Will you try to make manual deposits? Automatic deductions are the best because they don't require you to have much willpower, but it also means you won't have access to some of your money without going to the bank. Some people like to have their emergency fund in cash, but leads to a lot temptation: You will suddenly find all sorts of "emergencies" to justify spending.  Figure out which savings method will give you the highest likelihood of success, give a try for 2-3 months and then reassess.

You should also take some time to find a good saving account that will earn interest and has minimal fees. You want as much of the money as possible to go to your emergencies.
The third thing you need to do is set a total savings goal. We decided to use 5% of monthly income as the savings amount, so you can multiply that by 12 to get the annual goal and then divide by 12 to know what you need to save each month. I know the math seems circular because you have already calculated what 5% equals in dollars. But the truth is that people do best at saving when they set explicit dollar amounts and repeat them to themselves. Saying "I'll save 5% per month" is not as firm a commitment as saying, "I'll save $150 dollars per month. " The more exact you can make your goal, the easier it will be to measure your progress and stay on track.

After proper planning and preparation, you are ready to start building your emergency fund. Depending on how much you earn, it may be difficult to hit your savings goal at first. It is okay if you don't hit the exact amount at the beginning but remember that you are behind and keep looking for savings. You will feel a sense of accomplishment when you start hitting your goal. If you still haven't met your monthly goal after 3 months, then you need to take another look at your spending.


When  to Use Your Emergency Fund

Remember that the fund is for emergencies. The exact definition of an emergency will vary but the idea is that this money will be there when your other sources of money are not enough to meet your needs. You might have unexpected medical bills or need a new transmission for your car. These could be considered emergency expenses, but always try to cover these costs out of your regular income not your fund. If you find that the amount is just too much or you need to pay right away, then go to the emergency fund.
Basically, your emergency fund should only be used when there is no other way out.


A Note about Debt

If you have debts anywhere, you should work to clear the debts as quickly as possible. This doesn't mean stop building your emergency fund but you might consider creating a debt fund to get the debts cleared quickly. You can use the same methodology as with your emergency fund. Remember one of the objectives of the emergency fund is to avoid getting into debt when things get bad. If you are already in debt, then the value of the emergency fund is reduced.


Once the Money Starts Growing

At some point, the money you've saved will surpass the planned amount. You can keep it in the emergency fund and take solace in the fact that you are in good shape financially or you can look to invest it. You might also take the surplus and use it to pay off debts. Whatever you decide, just make sure that you don't drain the emergency fund.
Article Source: http://www.articlesbase.com/personal-finance-articles/what-people-need-to-know-about-creating-an-emergency-fund-5463529.html
About the Author

Bradford Exchange Checks focuses on the selling of personal and business checks at deep discounts versus banks. We also believe in helping people save money anyway they can. Buying checks online is one way to do this, but you can also find big savings by carefully managing your spending and understanding how you spend money.