Have you ever encountered unexpected expenses? Have you ever worked hard at creating a budget, worked on the budget and when everything seemed to be going well you get a budget buster? A budget buster can be defined as an unexpected expense that was not accounted for in the budget.
I don’t mean going to the store and buying a new radio because the old one is an older model. I mean my furnace just broke, we are in December and I don’t have the cash to repair it. Obviously the second of the two could be considered an emergency and will need to be addressed. What normally happens with these expenses is that they are not budgeted for so they get charged (credit card is the main method of payment). So how do you anticipate or handle emergencies?
The best way to put out a fire or handle a financial emergency is to have an emergency fund. I know that many people ask: how can I create an emergency fund if I can barely pay my credit cards and current bills?
Well the best way to create an emergency fund is to create a budget and in your expenses add a line called emergency and set a minimum payment on it. What you want to do is treat this as a bill, every month you will allocate an amount to go into the emergency fund. Make sure that the amount is consistent; every month put in at least the minimum amount.
You might wonder; what is a good amount to keep in your emergency fund? Most financial analyst recommends saving 3 to 6 months worth of take home pay as an emergency fund. You could start with a quick emergency fund or emergency fund lite of $1000 to get you going really quickly.
The question is how do you do it? Here are some tips and pointers to build your emergency fund quickly:
- When you get a pay raise, instead of taking the money and spending it, set up a separate account for your emergency fund and have your pay raise go straight into that account. (You lived without the raise before, you could live without it for a little while)
- Select a container at home and label it emergency fund. Every time that you have pocket change, instead of spending it, throw it in the emergency fund container. At the end of the year add it all up and deposit it in your emergency fund account, you will be surprise how fast it adds up.
- Buy Certificates of Deposits for small nominations ($500 or so) this way you will not be able to touch the funds until the maturity date as well as it serves as a good emergency fund. (Don’t get the CD for too long use 3-6 months max as you need to have access to it quickly in case of an emergency)
- If you get any windfalls, take a percentage and throw it into your emergency fund account
- If you get a tax return check, take a percentage and throw it into your emergency fund account.
- If you get an end of year bonus or commission bonus check you could take a good amount and use it to fund your emergency fund.
- Set up a separate high interest yielding account and set up a direct deposit from your paycheck to it (this way it is automatic).
Once you have fully funded your emergency fund, continue the process of saving the money you can increase your emergency fund or you can start investing in your retirement or major purchases like transportation or housing. Since it could take a very long time to fund your emergency fund, what I would recommend is partially funding the emergency fund (emergency fund lite). Instead of having 6 months of income in the emergency fund just have $1000 or 1 month and then payoff your debt as soon as humanly possible, once you are done with your credit card debt, then finish funding the emergency fund this will help you keep more of your money by eliminating paying your creditors your high earned money.
As you can see creating an Emergency Fund is not complicated but it requires a lot of discipline and patience. The complicated part of it is the discipline needed to follow through with it. It is human nature for us to start something and be very enthusiastic about it but then as the time goes on we just lose interest or expect faster results, do not rush it just be consistent and persevere.
If you encounter an emergency, normally your whole budget will be out of whack if you didn’t have an emergency fund, and that is why I encourage funding your emergency fund even if just partially to assist you in reaching your financial goals. Don't forget to re-fund your emergency fund if you dip into it for an emergency. Keep growing it slowly and always take action.