Emergency Fund AKA Your Warm Blanket

One major player in building a solid financial foundation is building a sturdy emergency fund. A rule of thumb is to set aside six months to a year worth of salary for a rainy day. Recently, it is more reasonable to set three to six months salary away. To me it is about starting somewhere and the best way to start is to have a set goal be it 1,000 or 5,000 dollars. You need a goal that is reasonable with your financial situation and that you can manage to contribute consistently. I came across a great article on www.gobankingrates.com (click link to article) by Cameron Huddleston entitled, "Prepare for the Unexpected With 14 Tips to Build your Emergency Fund" with good tips on saving. Do not be intimidated it is all about starting where you can. I will share nine of the steps and detail my personal experience/review of the article. For the complete article please click the link above.

Here are the points:

1. Assess your spending

2. Set reasonable goals

3. Make a budget

4. Track everything and pay with cash

5. Pay yourself like a bill

6. Open an inconvenient but high yield savings account

7. Put any unexpected money into a savings

8. Don’t pay off that credit card debt

9. Reward yourself

1) Assess your spending. I agree 100% with this step. This is crucial point because you need to know where you are currently financially. You need to know where your money is going before you can allocate any amount to an emergency fund. During this step, you can also see where your spending is out of control. For example, if you eat out for almost every meal start cooking at home. By cooking at home, you can save more and put the money into an emergency fund.

2) Set reasonable goals. I believe it is important to set goals you can reach within a specific time. One way to do this is to break a big goal into smaller goals. It helps keep you on track and you get to celebrate the little victories along the way. In addition, you want to avoid insurmountable goals to prevent burnout.

3) Make a budget. Once you finished your spending assessment and know where you money is going, you have want you need to setup a budget (I prefer the term spending plan). Set a monthly spending limit on your current expenditures. For example, if you spend $35 a week on your favorite latte set up a coffee budget that limits spending to $10 a week for your favorite latte and brew at home. Take the difference and put it in your emergency fund. Living under a budget frees up income for your emergency fund.

4) Track everything and pay with cash. Personally, I do not track everything I spend because I already have a spending plan. Tracking is more useful in step one when you assess your spending and when you are creating a new spending plan. Today it’s easier to track what you spend, if you use a card you can look up the transaction history, and there are plenty of apps available that tracks spending for you. Lastly, if you’re up for some work you can track spending manually by gather receipts and logging spending in your own excel file. Paying with cash has count down on my spending because once I’m out of cash I’m done, I can’t spend anymore. It is an effective strategy to saving money.

5) Pay yourself like a bill. This simply means that on every payday you put money into a savings. One way that I found effective is to setup an automatic transfer from your paycheck into a saving account.

6) Open an inconvenient but high yield savings account. I have not done this yet but look forward to in the future. The idea here is to put the money in an account that is hard for you to access. The harder you make a task or the more steps you add to it the more likely you will quit. The article mentioned setting up an account that is across town, the greater the distance the less likely you are to withdraw the money. I plan to take their suggestion and set up an online savings account at a reputable bank. Online banks offer better interests and they are online so out of sight, out of mind.

7) Put any unexpected money into savings. I thought this was a great tip but at the same time, it requires a level of discipline I am currently working on. The author suggests putting away that birthday money, and bonuses into a savings account. I have no problem setting a portion of a bonus into a savings account. However, honestly, the birthday money is going to my entertainment budget (depending on the amount).

8) Don’t pay off that credit card debt. The idea behind this tip is that sometimes it makes more sense to start a savings account while paying down credit card debt. If you put too much focus on paying the credit card off and do not have an emergency fund when an emergency hits you’ll have to rely more on credit digging yourself into a bigger hole. I agree with this point and believe setting up an emergency fund is fundamental for setting a financial foundation.

9) Reward yourself. The author recommends that after consistent discipline (every 6 months) you treat yourself to something you want that will not put you into a financial hole. I concur, we need to make this fun and reward ourselves for our hard work, be it a trip to the mall (within reason), a mini road trip or treat yourself to a nice restaurant.

Please feel free to leave comments about how you started your emergency fund. If you found this blog post helpful, please share with friends and follow for future blog posts alerts.

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