How to establish and create an emergency fund
Establishing an emergency fund is an integral part of a person's financial plan because of Murphy's Law. Murphy plays no favorites and likes to visit everyone once in a while. A person's water heater will break, the roof will spring a leak, the brakes will go out in your car, or a number of other things can happen at the worst possible time. However, people who have money set aside in an emergency fund can weather these storms with a lot less stress.
Hopefully you are convince that you need an emergency fund and now want to take the next step and find out how to establish one. The first step is to open a new savings or checking account at your local bank specifically set up for emergencies. Some banks don't require anything to open them up while others may require an initial deposit of $100 or so. Often, these free checking or savings account will not generate any interest for you, but that is ok , this account is for emergencies and is not being created to generate interest income.
The second step is to fund this account with at least $500, but preferably $1,000 or more. $500 will catch most of those small emergencies such as a brake job, a call to the plumber for a pipe that broke, or the quick trip to the emergency room at 11 pm because your child has a high fever. If your weekly income is greater than your weekly expenses, it will be easy to fund this emergency fund. Simply cut out all of the extra expenses that are not needed (show tickets, sporting event tickets, movies, eating out, etc.) and deposit this amount in your emergency fund account. Another way to fund this account is through your direct deposit at work. Many employers allow employees to have his or her paycheck deposited into two accounts. Have 90% of your paycheck deposited into your primary checking account and have the other 10% deposited into your emergency account until your emergency fund is fully funded. I highly recommend this method because it is done automatically and is a way of forced savings. If your employer does not offer this service, withdraw $20, $40, $60 or whatever you can afford from each paycheck and deposit it into the emergency fund account. Consistency is the key here!!! You must do this every time you receive a paycheck. If you get paid on Friday make the deposit to your emergency fund on Friday; do not wait till Saturday. The longer you wait to make the deposit into your emergency the less likely you are to make the deposit. If you can't afford $20, then deposit whatever you can afford. The important point is to deposit something every paycheck consistently. Establishing a $1,000 emergency fund is the first step in Dave Ramsey's best selling book The Total Money Makeover.
Establishing an emergency fund is a critical step on your financial peace journey.