an emergency fund is a key component in attaining victory over your
finances. As such, it’s important to
start one right away.
Why Have An Emergency Fund?
There are many
benefits to be gained by having an emergency fund, and no drawbacks. It may feel
like a drawback while you’re putting in the extra effort to build the fund, but
will provide great reward once you have it.
You’ll significantly reduce
the anxiety and stress over finances you currently may be experiencing
You’ll gain the peace of mind
you desire for when the tough times hit (and they will hit!)
You’ll no longer be thrown
into a panic whenever an unexpected expense comes up
It is your
It provides an easily
accessible source of cash when particularly large bills come unexpectedly,
or for when several financial issues hit at once and you weren’t prepared
for the onslaught
It will see you through the
tough times of a job-loss or an expensive hospital stay
It will cover the cost of
large car repairs or replacing appliances that quit on you
And best of all, your emergency fund will help you break
the cycle of dependence on credit cards and debt
Begin With an SES
(Starter Emergency Savings)
you’ve put together a budget,
start working to build your SES. This is your initial emergency fund to put in place
until after you’ve paid off your debt, and will keep you from taking on more debt.
STEP 1 – Do a bit of research to find the best savings vehicle for your
emergency fund. Do not use CDs (certificates of
deposit) or other investments that will
tie up your funds. It must be liquid, easily accessible, and penalty-free. This is
important. If you put your SES in
a higher-yielding vehicle in the hopes of growing it faster, you defeat the
purpose of your emergency savings.
You’ll find yourself protecting your investment, rather than the savings
protecting you. Yield is of no concern here.
Also, keep it separate from your
“operating account” so that you’re not tempted to use it for
STEP 2 – Put any
extra cash into your SES as soon as, and as often as, you can. Squeeze money from your budget, sell
something, mow the neighbor’s lawn, whatever it takes to get your SES up and
running quickly. NOTE: If you already have a chunk of money in an investment,
take it out (even if you take a penalty hit) and use this money as your
SES. It must be liquid. Using what you already have will put you
ahead of the game, greatly benefiting you in the long run, so take advantage of
what’s already there.
STEP 3 – Once
you hit $1000, celebrate! You
have your SES in place to catch any surprises while you focus on eliminating
your debt. Why $1000? I have noticed that whenever an appliance
breaks down or the clutch gives out, it always seems to cost several hundred
dollars to fix. A thousand is a nice
round number that is enough to handle those pesky surprises.
STEP 4 – Focus
your energies on eliminating
debt. It’s much easier to pay off your debt and
ditch the credit cards when you know you have a safety net in place.
STEP 5 – If an
emergency comes up, pay for it and go back to paying the minimum on your
debts until you’re able to replenish your SES. Then resume your debt elimination.
The SES teaches you the
benefits and peace of mind that come when you’re able to handle the unexpected
when it arises, and without taking on more debt. Then you’ll be eager to move forward and go
bigger without the deadweight of debt payments.
STEP 6 – Build
an FEF (Full Emergency Fund).
Once your debt is eliminated, continue using the snowball effect from debt repayment, but instead, you’ll focus
those payments on building up a full emergency fund. This FEF is the “new and improved”,
“bigger and better” version of your emergency savings.
That will depend on your family’s basic monthly expense needs. Go back to the budget you set up and find out
how much you generally spend per month.
Keep in mind that you usually spend more than you need, so basic needs
will often be less than what we budget.
When times get tough, we could and should cut back on expenses until
we’re back on solid ground. Your FEF
should provide 3-6 months’ worth of expenses
for any big emergency that could potentially kick your feet out from under you
(a job loss, medical bills, anything that could knock you for a loop for
NOTE: the FEF
is not for purchases or vacations. Also, Christmas is not an emergency. These are expenses that should be planned for
in your budget.
What if the emergency you end up facing isn’t about not having enough money? What if your daily challenge stemmed from a natural catastrophe: you can maybe access your money at the bank, but you can’t get your hands on any food at any store? Emergency preparedness should be part of your emergency plan, and stocking a month’s worth of food in your pantry can be considered part of your emergency fund. Keep it stocked up at all times, and you can reduce your FEF by an equal amount.
This is a scenario we tend to dismiss. Don’t underestimatethe value of food in your emergency “fund”.
In a Nutshell
The SES and the FEF give you
freedom from using credit cards for emergencies, and enable you to plan ahead,
instead of sinking intothe debt cycle or being led around by the nose by each
successive crisis. Whenever the need
arises to use your emergency savings,always replenish it quickly and move
What you are ultimately striving for here:
the freedom and peace of mind to focus on the things in life that really matter.
Because that is a sign of a
everyone who hears these words of mine and puts them into practice is like a
wise man who built his house on the rock. The rain came down, the streams rose, and the winds blew and
beat against that house; yet it did not fall, because it had its foundation on
the rock. But everyone who hears these
words of mine and does not put them into practice is like a foolish man who
built his house on sand. The rain came
down, the streams rose, and the winds blew and beat against that house, and it
fell with a great crash.” Matthew 7:24-27
ANOTHER POINT TO CONSIDERFOR INVESTING STEWARDS
Once your debt is paid off and you have built up an investment portfolio, consider whether or
not some of your emergency fund might include any income-producing investments
you have that you don’t currently use as income. I’m not talking about the investments
themselves, but the income from those
investments. For instance, if
your income portfolio spins off, say $250 per month in dividends, then you
could reduce your Emergency Savings account balance by $1500 ($250 X 6
months). That $1500 could be invested
back into your income portfolio to spin off even more in monthly dividends,
putting it to more effective use while keeping your 6-months’ expense figure
However, don’t carry this idea too far in an effort to “put all that money to
better use”. The point of
the emergency fund isn’t just to cover
3-6 months’ expenses, but also to provide a large
liquid chunk of money on short notice.
I do believe your investments can eventually help cover you during a dry
spell, but liquidity and protection of principal are key components of your
FEF, and not to be taken lightly.
a rule of thumb, and depending on the solidity of your income investments,
always keep at least the equivalent of 3 months’ expenses safe and liquid. The other half could potentially come from
any non-retirement income from
investments that you don’t already consider
part of your current income.
Weigh this one carefully to fit your own needs and
long-term goals,always keeping in mind the real purpose of the emergency fund.