Let’s face it, most Americans use credit cards or personal loans as our emergency fund. In the event some life event occurs requiring a dollar amount outside of our normal expenses, stress levels and worry increase. The remedy, developed an emergency fund.
What is an Emergency Fund
An emergency fund is is exactly as stated. Funding for a situation requiring a larger than normal outpouring of cash.
Here are typical reasons for emergency fund.
- Sudden unemployment
- Transportation problems (replacing a car or car repairs).
- Emergency Housing repairs.
How not to use an emergency fund
- Retail therapy
- Last minute birthday gifts and emotional or peer pressure
- A new car when your car is repairable or functional.
- Utilities bills
- Emotional purchases.
The emergency fund for most individual is easy to implement. If you are employed and have a 9/5 job, a quick visit to Human Resources can place your emergency fund on autopilot. Simply having a specific amount deducted from your paycheck and deposited to a separate account will make your emergency fund grow on autopilot. A typical amount is 10% of your take home pay. 10% is easily manageable and adaptable in a very short period of time to your lifestyle.
Before visiting Your Human Resources or payroll department, open a saving account that is not the easiest to withdraw money. You don’t want to make it impossible to obtain the money because you may need to acquire the fund for an emergency. So do not, put the money in a CD, money market, or IRA, the money must be available.
Something to keep in mind when opening the savings account.
- Do not get an ATM card for the account.
- Make sure fee’s are at a minimum.
- Have direct deposit.
- Don’t have a minimum balance or withdrawal penalty.
Once a savings account has been set-up, and you have visited Human Resources, then forget about it.
3 times you should think about your emergency fund most is when:
- You set the fund up
- Increase the amount going into the fund.
- Increasing money to the fund (When you deposit money outside of direct deposit).
Emergency funds are different from your general savings account, with a saving account being detained for long-term living purposes and retirement.
You may be wondering how much do you need for an emergency fund. The very minimum you will need 3 months of average living expenses with the goal of having a fund of 6 months of average living expenses. If you have 3 to 6 months of living expense will CHANGE YOUR LIFE and perspective about life and security.
To determine your three months of expenses, , go grab you latest three months of bank statements, six months would be better. I’ll wait……..
Now that you have your bank statements go through the necessary items you have paid during the period on your bank statements. Do not include unnecessary expenses such as diner, gifts etc. You will be looking only for important expenses such as rent/mortgage, home utilities, gas for your car, and other absolutely and essential expense.
Add those expense together from your collection of bank statements, then divide the number by the number of bank statement you used for your total. The result will give you a single month of average expenses. Multiply this number by how many months of an emergency fund you wish to own and have in you bank account.
You may be saying that seems like a big task, well, the important task is to start and place your emergency fund in Automatic Money Savings Mode . Every journey begins with the first step.
The second step first goal
The second step and first goal for your emergency fund is to accumulate an amount equal to a single untaxed paycheck, or $1000 . the reason I use $1000 is because that is an easy attainable number.
The first monetary one thousand dollar to entire untaxed paycheck will provide motivation to show you are making progress towards your 3 to 6 month emergency nest egg. It will also relieve some stress in your life.
You may be asking “what about my debts, I have to pay those too.” Yes you do, but look at it this way, yes you are making another bill, but you are paying yourself as any Billionaire Lifestyler would do. It is important to pay yourself before you pay everyone else, even if it’s only single dollar bill. Remember something is 1000% more than nothing.
Open a saving account that is inconvenient to access.
Setup automatic deposit to the savings account.
Put any extra money in the account to reach you $1000 dollars to dollar amount equal to an untaxed pay check.
Three simple steps toward The Billionaire Lifestyle. Since it is Tax refund season, use your tax refund to jump-start your emergency fund. With your tax refund, it is possible in some cases to hit all the goals of this blog post in one motion.