I have been doing a monthly series this year in my client newsletter about getting control of your finances this year. I decided to put these on my blog too. Here is part 3 of the series:
This month we're moving on to step 3 to get control of your finances. You've tracked your spending, and created your budget, now you need to....
3. START AN EMERGENCY FUND.
What is an emergency fund and why might you use it? Your emergency fund is an accessible stash of money to use ONLY for emergencies. For these purposes, your emergency fund is not for buying a new car or remodeling your home-it is for true emergencies that affect your income, like moving across country for a new job, a sick family member, or getting laid off. David Bach, author of The Automatic Millionaire says that "a real emergency is something that threatens your survival, not your desire to be comfortable."
Without an emergency fund, you may be inclined to increase your debt to deal with these types of situations-the very opposite of what needs to happen in those tough times!
How much should you have in reserve for those crises that come up? There are lots of different opinions on that topic. Some, like Dave Ramsey, author of The Total Money Makeover, recommend having $1000 in your fund to start, then work on eliminating your debt. Once that is complete, he recommends building a 3-6 month cushion. David Chilton, author of The Wealthy Barber, believes that $2,000-3,000 is sufficient since insurance should cover the cost of most emergencies. Many, including Robert Pagliarini in his forthcoming The Six-Day Financial Makeover would agree however, that 3-6 months worth of expenses (including mortgage) would be a great start. The answer is different for different people in different situations; but the important thing is to get started saving into your emergency fund and get to an amount that is comfortable for you.
To start your emergency fund, deposit $100 into a savings account, and then take a look at your budget, reduce your spending, and make regular deposits into your emergency fund without adding additional debt. You may want your emergency fund to be in a place that is not TOO easy to access if you think you may be tempted to dip in to it .
So, determine the dollar amount that makes the most sense for you, start saving to reach that goal, don't touch the money and put it in the right place (earn interest!). This may take some time, but it's an important part of regaining your financial independence. Next month, it's time to tackle DEBT!
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