Setting up an Emergency Fund
How to Set up Reserves for an Emergency and Why it's Necessary
Feb 11, 2008
Illness is the number one reason Americans file for bankruptcy. Even if you carry adequate health insurance, deductibles and co-pays can eat up your cash very fast. That’s why you need to set aside three to six months' salary in an emergency fund.
Finding the Money to Put in Your Emergency Fund
- If the money is not there you won’t spend it. That’s why you should have a portion of your salary automatically transferred into a savings account every month. You won’t spend what you don’t have. And before long you’ll forget it was ever there…Until you realize the savings you’ve accumulated.
- After you’ve accumulated $1,000 open a certificate of deposit. You’ll earn a higher interest rate, and you have an added incentive not to touch the money. Banks charge penalties for early withdrawals. You can always ladder your CDs by opening a new one every three to six months so that you consistently have a certificate coming due. Or spread your CDs out over time. Open a one year CD with part of your money and a two year, three year and so on so that you can keep re-investing.
Keep Saving Even after Your Fund Is Established
After you have accumulated six months' salary, don’t stop there! Keep saving. Either continue to open CDs or start investing in the stock market. But pay off all your debts first, starting with credit cards that charge the highest interest rate and work your way down. There’s no point paying 22 percent on a credit card debt while investing your money at only a 5 percent return.
Don’t Be Tempted to Raid Your Emergency Fund for Non-emergencies
A new flat screen TV that just went on sale is not an emergency. Neither are hair extensions for a big night out or a Caribbean cruise vacation. Having readily available cash for a serious emergency will give you comfort and peace of mind. And will also start you on your way to building wealth…Something you can’t do if you’re constantly battling credit card debt and living paycheck to paycheck.
When You Might Need a Larger Emergency Fund
If you are employed in a very specialized field and know if you suddenly lost your job it might take a year to find another one, you’d better have 12 months' salary saved up. And what if that emergency never happens? Let’s hope it doesn’t because now you are well on your way to saving for a comfortable retirement or that dream home you had your eye on.
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