Creating An Emergency Fund
by Pat Veretto
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How Much Do I Need in My Emergency Fund?
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Everyone knows that we should be saving for a rainy day, right? Probably no one would say that we shouldn't, anyway.
You may be thinking "Aren't rainy days what credit cards are for?" That's exactly what the credit card industry wants you to think, but it isn't the best money strategy. What is best is - you guessed it - savings for a rainy day.
What makes a rainy day? That depends on your individual circumstances. For myself, I needed to consider broken picture windows, plumbing problems, emergency trips for various reasons, and loss of income due to illness. My car is cheap to maintain, but most of my appliances are old and could give up the ghost at any moment.
Since a good refrigerator could cost a thousand dollars, I decided that would be my goal. I opened a savings account, so I could withdraw on demand, but you could put it under your mattress or in a cookie jar or a piggy bank, as long as you know you won't spend it elsewhere. You could hide it in your checking account by writing (uncashed) checks until you have your goal figure. This takes a little more bookkeeping, but it works.
That may not sound like good money sense because you're not making interest on it, but it makes a lot more sense than borrowing on a credit card. At least, you won't be paying interest on it.
In a fit of determination, I began an emergency fund that was totally off limits for ordinary living expenses. It didn't take nearly as long to beef up as I thought, and it sure gave me peace of mind and sound sleep, along with the cash in hand. No more worry that tires needed to be replaced, or how much it cost for new glasses.
Here are some of the things I learned to do:
- I had to do it now. Don't wait until some future event to start, not even until next pay day. If you're going to do it, start now.
- I had to start where I was. Could you give up ten dollars right now? Five? Maybe you'll never miss the coins in your pocket. Put it away and pretend you never had it.
- There was money dribbling through my fingers I didn't even know I had. Save "extra" money, such as refunds, gifts, found money and so on.
- Save your change at the end of each day or week. Deposit it in the fund and forget about it.
- I had to learn to be consistent. Put a certain percentage away each payday. One percent, along with these other ideas, will grow more quickly than you might imagine.
- I had to work a little harder. Add an extra source of income, like babysitting or typing or recycling.
- I had to respect the pennies as much as the dollars. Don't keep from saving because you don't have much to put away. Every little bit helps.
- I learned to challenge myself. Make it a part of your day to look over your savings and see what you can add to it.
Minor (and major) emergency funds, in the right place and the right amount, can save you a lot of money, besides giving you peace of mind. Specifically, the nuts and bolts advantages to having an emergency fund are:
- You don't have to withdraw money from other funds, which yield a higher return.
- You won't run the risk of getting into credit card debt. Even if you intend to pay off a charge before interest gets added to it, there's still the chance that something else will come up.
- You won't be tempted to spend more than you can realistically afford, as most people do when using a credit card.
- While an emergency fund usually makes very low interest (or none), it has the potential to bring some return instead of nothing at all.
- Other reasons include not having to ask a relative for a loan and not having to eat rice and beans for a month.
Will the fund ever get bigger than your needs? Yes, it can! I believe it can because mine did. When it does, treat yourself to something, or put the excess toward retirement or college savings.
It's a great feeling to walk into a store, choose the washer or tires or couch that you need and just write a check for it.
Pat Veretto is a work at home grandmother who has homesteaded, homeschooled and happily lived frugally most of her life. She currently freelances.
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