Building an Emergency Fund

Creating a healthy emergency fund can at times be a lofty and intimidating goal. Do you ever find yourself thinking, “What if the unexpected happens? Will I be able to weather a financial storm?” But then every time you think about the amount of money you would have to save, you talk yourself out of starting?

But in this uncertain economy the watchwords are, “Save your money!” These watchwords will come in handy should anything catastrophic happen.

Emergency funds are a very important component to a healthy financial life, and having that safety net sitting in an account somewhere will give you peace of mind, knowing that should something unexpected happen requiring the use of savings to get you through a number of months, you have it at your fingertips.

But how do you accomplish this? And what is an emergency fund anyway?

An emergency fund is cash that you’ve saved up for the sole purpose of helping you maintain your financial obligations through emergencies.

One sure way to deplete this fund is to spend the money on non-emergencies. That is to say, you’ve accumulated a pile of dollars in savings, and all of a sudden you get the itch for an extravagant purchase. Say bye-bye to your emergency fund.

If you want a savings account to reward yourself with something nice, then by all means, open a separate account, and call it your “Rewards Fund,” and go buy that flat screen TV or a vacation to Hawaii. But don’t touch the emergency account. A week-long getaway to Maui more than likely doesn’t fall into the “emergency” category.

Targets

First step to building your emergency fund is to set a reachable savings goal. Start with $500. That’s something that can be done in a few months, or even less if you are frugal.

Put a time limit on it. “I want to save $500 by June 1st.” Ok, so now you can break that down into how much needs to be saved monthly or even weekly.

Find the money in what you’re already spending.

You may have asked yourself, “How do I save $50 a week, when I’m barely making ends meet as it is?”

The trick is to not have to earn extra money, but rather make those ends, meet and find the savings in the money you’re already spending.

For example, take a look at your credit card payments. Is there a way to reduce your rates? Turn over your credit card, and call the number on the back. A simple request to get a rate reduction might result in a pleasantly surprising outcome.

Shopping around for better insurance policies can save you money. So can installing a programmable thermostat and planning your grocery shopping instead of just wandering around the aisles picking up random, unnecessary items.

Try reducing your number of dinners out per month. You’d be surprised at how much you spend on restaurants. Saving money on gas is easy if you have a colleague who lives close by and is willing to car pool, or use public transport.

Ask yourself, “How often do I watch Netflix? Cable?” Find those monthly bills that you’re paying that you’re not using. Is there a better cell phone plan you could be on?

There are remarkably wasteful ways Americans spend their money. USA Today recently listed the top 20 recently. Chief among them were: wasted energy bills, daily coffee purchases, premium cable packages, traffic tickets, lottery ticket purchases, unused gym memberships, tobacco, alcohol, gambling, ATM fees, expensive (unneeded) warranties, credit card interest, and so on.

Before you know it, that $50 will be easily available to you and ready to be stored away in your emergency fund account.

In a few months, you’ll hit your first goal. Now set another goal, maybe double the amount. And keep going until you can reach a goal of having an entire month’s worth of expenses sitting in your account. Then two months, three months, and so on.

If and when an emergency does happen, you’ll be able to sleep at night, knowing that you planned ahead and can continue living your life undisrupted.

IMPORTANT DISCLOSURES

Material contained in this article is provided for information purposes only and is not intended to be used in connection with the evaluation of any investments offered by David Lerner Associates, Inc. This material does not constitute an offer or recommendation to buy or sell securities and should not be considered in connection with the purchase or sale of securities.

To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law.

Each taxpayer should seek independent advice from a tax professional based on his or her individual circumstances.

These materials are provided for general information and educational purposes based upon publicly available information from sources believed to be reliable– we cannot assure the accuracy or completeness of these materials. The information in these materials may change at any time and without notice.

David Lerner Associates does not provide tax or legal advice. The information presented here is not specific to any individual's personal circumstances. Member FINRA & SIPC