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7:47 pm - Tuesday December 6, 2016

Emergency Fund 101

| Management | Rating: 4.5
by Numan

You have one right?

That little nest egg for a rainy day, the “opps” fund when something in life doesn’t go according to plan?

No?

Why not? It’s one of your most important tools to getting your finances back on track. Some people will tell you it’s reducing your credit card debt, or paying off your student loan, and yes, they are all important.

But the emergency fund is what will stop you ever having to put some unexpected expense on credit.

How does it work?  There is no hard and fast rule, and the amount is specific to the individual. But as with many things to do with budgeting, it is about discipline.

So, want to get started?  Here we go then.

  1. Set up a low interest, no fee savings account
  2. The day before payday, transfer whatever is “left” before you get paid into this savings account

Simple as that, nothing fancy, not tricky formula.  Whatever you have left in your day to day account before your pay goes in goes towards the emergency fund.  Be it a dollar or ten dollars.

Some people go, “but I never have any money left” or “well, it was only a couple of dollars”.

To the first objection, once we get you onto a budget, you will have some left, and you will see why the above approach works and works well.

To the second objection, so? Do you think Rome was built in a day?  A little every payday adds up.

Now, what exactly is the emergency fund for? A holiday?  Pay the kids school fees?  Nope.  Hopefully you will never touch it, ever, but that’s unlikely.

Consider some of these scenarios:

  1. your spouse is away on business and is killed, how quickly can you raise the money to get everything sorted before the insurance comes through to help you out
  2. you smash your car up, and urgently need money for legal bills or the excess?
  3. insert some other unexpected event that usually means most people have to use their credit card/overdraft

It may seem very simplistic, and to a degree it is. But that’s it’s beauty.

One thing though, it doesn’t help if you need the emergency fund in the first few years.  It’s reliant on time to build it up.

But consider this, lets say you get paid weekly, and you have 3-4 dollars at the end of every pay cycle. After five years you will have around $750 to $800 dollars.  Not a lot you say, but it’s money you would have wasted, and certainly not money you would usually miss each week.

However, if you are caught short due to unexpected events, having that extra money is going to help, and it’s not diluted by other savings (which I will be going into in a future post).

So, get started on your next pay before life throws that curve ball and you have to put stuff on your credit card.

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