How to start an emergency fund
As recent events have shown, our economy is highly unstable. You never know when something is going to change. You don't know if the stock market is going to go up or down. People's fortunes are made and lost very quickly. But even with the economy doing crazy things, what about the personal emergencies that each of us will surely face in our lives. For example, what if you were to get into a bad car accident and have very high medical bills? What about a flood or a fire in your home? Even if the economy is stable you can't rely on your own economic situation to remain stable. Almost all of us will face some real hardship in the future that challenges us financialy. Another serious problem can be employment. Most people will switch careers at some point, and many others will be layed off at some time.
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What will you do if you are laid off? Do you have the money to keep you going while you look for a new job? Bankruptcy is not an option that you want to consider. It destroys your credit forever and has other very serious repercussions. So how can you plan for an emergency? The best way to start is by creating some sort of emergency fund.
Emergency funds are specific accounts or funds designed for one purpose. They help to support you or pay for something in a time of real emergency. They are not there to be used for entertainment, travel, retirement, or buying a new car. The primary purpose of these things is simply to sit there until you absolutely cannot manage without them. A real emergency might be something like a major medical problem, an accident, or loosing your job. You need to plan seriously for these sorts of things.
So how much money should go into this fund? This depends allot on your situation, but it should probably be enough to cover your mortgage or rent and other living expenses for atleast three months. Sometimes finding a new job can be a real challenge and you will need ample time to do so. However, this amount might vary depending on how large your family is. Obviously if you have children you need to think about this and budget accordingly.
One of the biggest chalenges to saving is discipline. Most of us are too tempted by things we would like to buy to keep money in savings for long. One solution would be to open an account in a separate bank-one you would never use. The bank could even be in an entirely different location from the one you normally use. You could also have some regular amount of money electronically shifted to this account with every paycheck. You would probably even forget about it quickly, but when you really needed it the money would be there and would probably save you. It is not a good idea to burry your money in a box in the backyard. You want an account that will earn some interest so that your emergency account naturally grows. Use your spouse or a family member to help you stay dilligent in not withdrawing anything from the fund. With some careful and patient saving you will have a sizeable emergency fund that will surely be used in a time of need. When that time comes you will also have the satisfaction of remaining financially independent. You will know that you planned wisely and that you helped insure the financial wellbeing of your family.
