Preparing for the Worst – Building Your Emergency Fund

So now we’ve calculated your net worth. Based off your net worth, we’ve set up budgets for each month. Now is the time to start building an emergency fund, because you never know what life is going to throw at you… and mostly, it seems to like cruel tricks.

The idea of an emergency fund is to give you a cushion in case of an emergency. You should have about 6 months living expenses plus whatever your insurance deductibles are. My emergency fund goal is $10,000 – $8,000 for at least 6 months living expenses (a year is better – especially in this job economy) and $1,000 for car and health insurance deductibles. I think $8,000 was a little bit of an overestimation, but I’d rather be safer than sorry. Also, I work in theatre, which is not a stable business, so 6 months of unemployment does not seem unfeasible to me.

Tips for Building a Great Emergency Fund

Tips for Building a Great Emergency Fund

So, check out your budget again and maybe add a new line to it. Seriously, even if it’s only $50 a month, it’ll take you like 10 years, but eventually you’ll get to your goal. I set mine at $100 a month, but I’ve managed to contribute more than that most months.

Does the 10 years thing seem too daunting to you? Understandable. So start with a smaller goal. Look at one of your insurance deductibles and save that up. When you hit that number, add the next deductible to it. Then you’ll have a nice little chunk of change. Then figure out what you’d need to stay solvent for 3 months and start working towards adding that. Then add another 3 months and then 3 more and eventually, you’ll get there.

Unlike other accounts, the idea is to leave this money in a pretty accessible place. You don’t want it tied up in a CD or something if you suddenly find yourself in need of it. I keep mine in a savings account that has a decent interest rate if you keep more than $2,500 in it. If you’re just starting out, any savings account will do, but I really advise you to keep it separate from your other bank accounts so you’re not tempted to access it. Mine takes 3 days to transfer money, which keeps me from ever tapping it for something last minute, but still leaves it available if I find myself facing life in a cardboard box.

Some tips to find money for your emergency fund (several are stolen from great websites like BeingFrugal, The Simple Dollar, and MoneyNING):

1.) Quit a bad habit and put that money towards your emergency fund (seriously do you know how much a year of heroin costs? You’d be set. Or, you know, cigarettes, if you’re a drug sissy). Coincidentally, quitting something like smoking may well lower your insurance costs too. Dump that extra chunk of change in your emergency fund as well.

2.) Pretend everything costs $5 extra. Whenever you make a purchase (your weekly groceries, that cool dress, school books), put 5 dollars towards your emergency fund.

3.) Find some unnecessary luxury and look at how you can save money there. Love manicures? Learn how to do them yourself and treat yourself to a monthly bottle of new polish instead. Instead of $20, you spend $5 and can put $15 in the emergency fund. You’ll get even bigger savings if you change from 5 mornings a week at Starbucks to 1 (estimated $20 savings, at $5 a coffee). Have a bad DVD buying habit? They’re free at the library. Honest to goodness free. And if the flick sucks, you won’t have any buyers remorse. Look at where your money is going and see what you can cut back on.

4.) Pick a denomination – $10 or $20 – and always pay for everything in cash. Whatever is left over from each purchase goes into your emergency fund.

5.) Living with your significant other? Make it a game. Nothing spurs me on like competition. Whoever has the lower balance or contributed less savings to their emergency account for the month buys dinner for the couple – or is heckled mercilessly – or has to sit through the other’s choice of movie – whatever motivates you.

6.) If you have a large credit card balance, call the credit card company and ask for a rate reduction. Imply that you’re considering transferring your balance off of that card. Have a new number in mind in case they ask.

7.) Carpooling could save you ridiculous amounts of money because gas prices are redonkulous. Or even start bike riding or walking to work.

8.) Dedicate all found money to your emergency fund. This doesn’t mean go out and purchase a bunch of lottery tickets. It means whenever you get some cash for Christmas, Hanukah, your birthday, graduation, possibly even your wedding, it goes right into your emergency fund. Even things like rebates could fit into this category. Just pretend like you never even saw it.

9.) Emergency savings funds are a great place for tax returns to wind up.

10.) Sell things on ebay or Craigslist. Figure out a skill you can pimp out on Fiverr. Sell your cool wire earrings and fork necklaces or whatever you can make on etsy and contribute all of that income to your savings account. Comb through the attic and sell old books. If you Google “sell used books” you’ll find like 10 different companies that buy old books and pay for the shipping to get them. You just enter the UPC or ISBN number from the book

11.) If you’re good with credit cards, and ONLY if you’re good with them, sign up for a cash back rewards card and deposit that money into your savings account.

12.) Check out your state’s rules about recycling. If you save up a garbage can full of aluminum cans, that could be worth a little change if you take it to a scrap metal place or recycling center.

Get in the Habit of Saving

Get in the Habit of Saving

So you’ve already got a little nest egg, or starting one doesn’t seem wickedly overwhelming:

If you’re a little more financially solvent, you can just decide how much you can contribute each week or month and have your checking account automatically send that amount to your savings account. Then you won’t forget or have to worry about it.

Another great tip from Payoff.com was to keep a daily reminder of your goal by putting a Post-It on your credit or debit card. I’ve also seen, on workout sites, the idea that it takes 3 weeks to really get into the habit of something. If you decide you’re going to save say, $2-5 a day, set up a piggy bank and put 21 Post-It’s on the wall next to it, each numbered. Every day you put the money in the bank, pull a Post-It off the wall. If you don’t feel it’s a habit after 21 days, put 21 more Post-It’s on the wall.

Check out banks with the best interest rate. Some of them may require a minimum balance. If you’re a good saver, make your first goal to hit that number (which can be anywhere between $500-5,000, depending on the bank) and then open an account with that bank. Just make sure the worst thing that will happen is you switch to a lower interest rate if you dip below the minimum – the idea behind an emergency savings account is that you can still access the money pretty easily.  You might as well have your money doing a little work for you while it’s sitting there.

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