The Steps Towards Building an Emergency Fund

*Contributed by Eric Brown.

Financial management is a skill that many in the USA appear to have missed. The amount of credit card debt alone suggests that many regard their credit cards as a license to spend, often with little regard to whether they can afford the purchases. Consumers are paying a heavy price for the privilege of having a credit line and credit card companies are only too willing to profit from that. The high rate of interest they charge spells trouble for ordinary people who have not learnt the principles of good financial management and budgeting. Worse still, few seem to have the resources set aside to address a financial emergency. These things do happen and if people need to resort to even more card spending to address the problem, then their troubles are likely to worsen. Do you see yourself in this position?

In the past, the card companies were fairly lax about issuing cards and increasing credit limits. Things have changed somewhat and it is not as simple to get the credit limit increased. Those close to their limits who are then faced by an emergency may have far less latitude. The obvious answer is to have an emergency fund set aside for such things, bearing in mind it will earn interest along the way. Unexpected repair bills for medical costs are everyday events. They don’t just happen to others.

The first step for anyone in financial trouble is to recognize that there is a problem. It is all too easy to ignore the situation. Credit card companies will not look to get a balance repaid as long as the user pays the minimum required on the monthly statement. Paying that before expensive interest is added complies with the terms and conditions of the card. What is easy to ignore is the total balance itself which will only be sought by the card companies if the user defaults. There is temptation to ignore the balance in the absence of a demand for repayment. You must think about all of this and start to look for answers to a problem that is only likely to grow otherwise.

 

Set Yourself a Target

An important element in committing to saving and persevering with that commitment is to be realistic so that you do not get discouraged and give up. If you think it is hopeless, then that is the likely outcome. Only you will know in the short term how much you feel you can set aside to start an emergency fund. If you prepare a budget and appear to be spending all your monthly pay check to cover your bills, then you must look to make economies. There is scope to look at regular bills where there may be better deals in the market place. There are comparative websites that look at utilities, insurance and telephone network supply that can do much of the background research for you. If you can make savings in these areas, commit to setting the savings aside for your fund.

That is a start towards the initial figure you have set yourself.

 

Decide on Where to Save

If you select an online savings account, you will be able to transfer any amount easily, even just a few dollars. It is better to separate the home of a savings account from your checking account at the bank. If you can access your saving easily using a debit card, you will always be tempted to spend savings.

You should look at the interest rates on offer and the fees involved before deciding the exact place to put your savings.

 

Don’t Give It a Thought

The best way to save is to regard your monthly income as the amount that you have left after you transfer your savings into that savings account. You should arrange for that to be done automatically just after your pay check goes into your checking account. There will come a point when you regard this money as completely inaccessible. You won’t give it a second thought.

Your first target may be several months of such transfers but that should not deter you if you regard the transfer as manageable and the target as achievable.

 

Gradually Increase your Commitment

As time goes by, you should find things easier. The whole process will become second nature and perhaps you can slightly increase what you are setting aside? You will have adapted your lifestyle to the money you have available so there is unlikely to be any major pain in a slight increase.

Hit a Target

In an ideal world, you should try to save enough so your emergency fund is the equivalent of six months’ living expenses. It is not an exact science but that should be sufficient to address any problems. Once you get there, there is still every reason to continue to save and invest. After all, the day will come when you retire and you want life to be comfortable.