An emergency fund is an important part of a healthy family budget, and it should always be established as soon as possible. Having a healthy emergency fund could mean the difference between surviving a financial crisis intact or winding up in serious financial difficulty.
It is the law of averages that at some point in your life, you will be faced with a serious financial crisis. This could take the form of a job loss, a medical emergency, or a large and unexpected repair that is needed on your home.
How much money should be in an emergency fund?
First establish a minimum emergency fund of three to six months worth of expenses. Add up all of your bills and costs to determine the actual dollar figure you need.
In the current economy, you might find yourself out of work for a longer period of time and may need an even larger amount of cash put away. An emergency fund of six to nine months worth of expenses should give you that extra security you need.
Don’t be intimidated. Remember, you can start slowly and continue to add money to your fund. Start with trying to put away just $100-$200 a month and then go from there.
Where can you find the extra money?
When finances are tight, it is hard to contemplate being able to squeeze even more money out of the budget for an emergency fund. Most people can do it, though, if they stay motivated. Just remember that the extra work and sacrifices are just temporary, and at the end you will not only be protected, but you will gain a strong sense of accomplishment from your efforts.
One way to start stocking an emergency fund is to alter your existing spending habits. Take a look at every thing you spend and try to eliminate or reduce your costs. Give up eating out one time during the week and place the extra $40 or $50 into your emergency fund. Cut coupons or buy generic groceries. Call and negotiate for a reduction in your insurance or cable bill. There are hundreds of little ways to save money. Do as many as you can and make sure the savings goes toward your fund.
Along with cutting back on spending, you can find additional money by earning it. Consider getting a side job or establishing a home businesses. Hold a yard sale and make some money from your clutter. Babysit. Do whatever it takes to increase your income.
Where should I put my money?
You want to place your emergency fund in a place that is safe and secure and also accessible. A money market account is probably the best choice, although you can also place it in a savings or checking account or a CD. If you are placing the emergency fund money in a checking account, make sure it is an account that is separate from your main checking account. Otherwise it might be too each to spend your emergency fund on every day expenses. The downside to a CD is that you will pay a penalty if you withdraw your money before the term of the CD has been reached.