The Importance of an Emergency Fund

As children when we receive money as allowence or cash birthday presents we tended to save enough to buy something we wanted.  We focused on our wants because our needs like food, shelter and clothing were taken care of by our parents.  At least that was the situation for those of us lucky enough to have caretakers that took care of our basic needs.

As we enter High School and develop through our early twenties, we have to start taking on the responsibility of taking care of paying for our own needs with money we earn from a job.  Hopefully by our mid twenties we have figured out how to pay all of our basic needs and also have some idea how to save up for our wants.  Not all of us get to this point. Ever.  Some blame it on the credit card they receive their freshman year of college and others just live paycheck to paycheck regardless of how high their income rises.

Growing up as far as personal finance and money is concerned we tend to figure out the difference between spending money on our wants versus our needs.  What is more subtle and thus harder to realize or figure out is how money, at its best, is a resource.

The most essential resource and the first thing necesary to establish once you start earning money is an EMERGENCY FUND.

How to Start an Emergency Fund

• Look at your spending, determine what is a necessary expense i.e. what you would still have to pay for after you lost your job, and add up those expenses for the month
• Suze Orman recomends that you have 8 months of living expenses saved.  That is definatly a good start in this market.  So say you need about $2,000 a month to live off, just multiply that by 8 and you arrive at $16,000.  And thus you should stash 16,000 in a savings account that you can access easily but you only use for emergencies; like getting laid off.
• Realize that it will take time to save up that initial amount for the emergency fund.  The best advice is that you live on the minimum amount you can, delay buying a new iPhone or computer or anything else unnecesary to survival, and stash everything left over each month into that emergency fund savings account.
• Enjoy the fact that you have established an emergency fund.  You are using money like a resource instead of it working you over.  If you lost your job tomorrow, you would have 8 months to find another source of income.
• Remember to replace any amount of the emergency fund that you use for emergencies.

Once you have established an emergency fund, you should feel that stress and tension leave your body.  You have just given yourself 8 months; time to look for another job, or come up with an alternate plan or develop additional income streams.  Had you not had the emergency fund, and you lost your job, everything you had would come falling down like a house of cards.  Aside from losing all those things you had accumulated, you’d now have to worry about where your next meal would come from.

Do yourself a huge favor and maintain an emergency fund.