Wednesday, April 21, 2010

Why You Really Should Have an Emergency Fund

So if you read Total Money Makeover by Dave Ramsey or any of Suze Orman’s books they will both tell you that you need an emergency fund. Start there first. So a lot of people myself included think “Ok I’m $20K in debt and you want me to put $500 aside for a rainy day, come one let’s be serious.” The reality is we all need an emergency fund and it’s not a rainy day fund that you can do with whatever you like. It is for a broken air conditioner, car repairs, etc.... NOT a sale at Express or a can’t miss business idea.

So do it establish an emergency fund. I don’t want to see your car die or have to get towed(just happened) and you have to put all of that debt on a credit card because you can’t afford it. That is what the emergency fund is precisely for.

I have read numerous finance books and blogs about how much you should establish an emergency fund with. I have read anywhere from $500 to 6 months worth of your salary. Here is what I recommend for everyone in there 20’s and early 30’s.

· Start Small.
Put $100 in a checking/savings account(not a CD, 401K, IRA). If that is to large I want you to take whatever you can and put that in the account. Also I want you to do whatever you can to bring that money up to $500 over the next couple of months. Sell your books, dvds, put a hold on your gym membership, eat brand X instead of brand Y. Think of all the ways you can save and just do it.

· Now that you are at $500 congratulations
, that was great and now you don’t have to worry about the tow truck. Now the next step. I want you to take $100 out of your paycheck for the next 5 or 6 months. I’m not saying this is easy, but I want you to stick with it. This will be the beginning of something beautiful.

· You are set.
If you are in your 20/30’s single or at least not married. Congratulations I believe you have a great emergency fund and anytime you have a true emergency use it and when you use it start over and Start Small to build it back up.

· Married Life.
So if you are married you need to take this to the next step or even if you feel that your job is insecure maybe you get layed off during winter months. You need to build and build this emergency fund to where you feel comfortable if you lost your job or something unexpected would happen you would be prepared. This is where you should build anywhere from 3-6 months of your salary into the emergency fund.

One of the first things you need to do is establish the emergency fund, it is the smart thing to do. If I were your personal finance guide, this is how the steps would look.

1. Find out where your money is going

2. Figure out how to stop it from going to bad places

3. Start putting your money in good places(start an emergency fund)

Any good personal finance book should at least mention an emergency fund. But don’t take my word for it read a money/finance book and see what they have to say.

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