Five Steps of the Emergency Fund

  • Dec 12 2014

There are a plethora (that word always reminds me of the Three Amigos movie) of personal finance and budget theories, however one element always seems constant, which is the emergency fund. No matter who you are there will be a financial crisis in your life at some point. Whether it is an unexpected job lose or a vehicle breakdown you will be protected with an emergency fund. Plan for the unexpected!

So, I am going to save you a lot of money with this article so you will not have to see a financial planner. In addition, I have learned that this is the safety blanket that my family needed in order for us to feel comfortable investing.

Five Steps of the Emergency Fund

  1. Three - Six Months of Expenses Saved - If you spend $2,500 a month on all expenses (to include the mortgage, electric, water, food, gas, etc) then you should have $7,500 to $15,000 saved for a rainy day.
  2. Must Be In Liquid Savings - The emergency fund must be saved in something that you can get quickly, which does not mean a CD, Mutual Funds, or Stocks. Generally, a bank savings account or a money market fund are your best options.
  3. Must Be in Safe Investments - It is guaranteed that something bad will eventually happen in your financial life so the emergency fund must be saved in safe investment where you do not lose money. Last year, my wife and I needed new tires on both of our vehicles and unlike in the past the purchase was not a stressful event because we had the emergency fund. Again, a bank savings account or a money market fund are your best options.
  4. Do Not Touch the Emergency Fund - The emergency fund is not for Christmas or vacation and believe me this is a hard one to adhere too. This money is for true emergencies and you will thank yourself for not touching the fund. The best way to protect the emergency fund is to separate it from your checking account and overdraft protection. Maybe place the emergency fund in another bank so you are not tempted to use it in a “make believe emergency.”
  5. Make Sure the Whole Family Is Involved - Save yourself or your family from sabotage by getting all parties involved and onboard with the emergency fund. Communication with your significant others is the key to success in achieving and maintaining an emergency fund.

Remember, the best way to fully fund the emergency fund is to get started now. So take action!

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