Personal Finance 101: Building an Emergency Fund


There are three basic essentials of personal finance. Eliminate credit card debt, save for retirement and most importantly, have an emergency fund in case something unforeseen happens. Some Americans are very disciplined when it comes to saving for emergencies, controlling spending habits, credit card use and putting enough away for retirement. Unfortunately, a large number of Americans don’t do any of these things. Most spend lavishly on items they simply can’t afford. Instead of saving for retirement and building that emergency fund, they live for the moment and spend beyond their means.

While it’s important to control debt and save for retirement, it is far more important to build that emergency fund. It’s a last resort but the first resource needed in difficult times. Eliminating debt and saving for retirement can be done over time, but there is nothing as urgent as the emergency right in front of you. Whatever it may be, be it loss of employment, an accident or medical emergency, having the funds available when you need it most is essential. Being out of commission for extended periods can be a huge drain financially for both yourself and those around you. The emergency fund offers peace of mind and the confidence in knowing you’ll be able to take care of both yourself, and your loved ones, in times of need. It’s essential to start building that emergency fund now. How is the emergency fund set up and what criteria should one consider before moving forward?

Take Inventory of Your Monthly Payments

When looking to start up an emergency fund, start first with writing down your monthly expenses. These could be your mortgage and car payments, utility, heating, groceries, gas and any other monthly bill payment. Be sure to include all the monthly bills and their appropriate amounts. You’ll need this to establish your savings goal for the emergency fund and to determine the length of time you’ll need it. What’s a good rule of thumb on how much to save and how long the emergency fund should last?

Save Enough to Sustain Extended Periods

At one time, the standard rule of thumb was to have an emergency fund capable of paying monthly expenses for a period of 6 months. However, given the severity of today’s economy, it’s perhaps better to plan to cover expenses for 6 months to a year. Sure, this won’t be easy. It will take time, but there will come a day when you’ll have more than enough saved up and you’ll be happy you did it. Start saving this very instant. Don’t delay and think it’s not worth doing. If anything has been learned from this recession, it’s that all those old rules should be thrown out the window. There are new worst case scenarios to consider. Severe recessions and extended periods of unemployment can and will happen again.

Choose Safe & Secure Investments

You’re not after high returns on your emergency fund. You need safe & secure investments where your principal will be protected and guaranteed. These investments include standard savings accounts, government bonds and treasury bills, health savings accounts or any other low risk investment. The purpose is to build the emergency fund over time. Treasury bills, government bonds and savings accounts are perhaps the easiest and safest investment vehicles for Americans today. They guarantee the principal and offer competitive interest rates. Treasury bills and government bonds are short term securities sold by the U.S. government. They can be purchased through your employer or from your local bank.

Finally, make the process of saving money easy. Make sure to set up periodic withdrawals from your bank account directly to your emergency fund. This could be done weekly, bi-weekly or even monthly. Make sure the withdrawals are done automatically. When it’s done right the first time, you won’t have to do anything else from that point forward other than watch your savings grow.

This post was written by

jason – who has written posts on Budget Clowns.
Father of three and married to a lovely women. Always looking for ways to save money, and invest it properly for my children's future.

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