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Emergency Fund 101

July 23, 2015 at 12:00 AM

It makes me so sad to read reports that many households don’t have even $1,000 set aside to cover an unexpected expense. What’s so sad is that I know that must cause such stress. If you don’t have an emergency cushion, on some level you’re always worried about what you’ll do if one of life’s “what ifs” strikes.

I know many of you want to have an emergency fund, but then you talk yourself out of it before you ever begin saving. Because you know you can’t just snap your fingers and have plenty saved up, or you think you can’t afford to start saving now.

No more excuses. You can do it. You must do it. Here’s how to start TODAY.

  1. Open a savings account. It can be at the bank or credit union where you currently have a checking account, or shop online for a high-yield offer. 
  2. Name it. If you have online access to your account, chances are you can name your different accounts. Be sure to give your savings account a very specific name: My Emergency Fund. Or: My Safety Net. Trust me, every time you log on and see the account name it will serve two purposes: it should make you feel so great to know you are building security, and by reminding yourself of your goal you will be less likely to raid the account for a non-essential expense.
  3. Set up an automatic monthly transfer from your checking account into your savings account. This is the crucial step. You must remove yourself from the equation. We all have good intentions, but often can’t follow through on our intentions. By setting up automated deposits into your savings account you are setting yourself up for success.
  4. Push yourself to save a little bit more. How much to save each month is up to you. Think through what you want to start with. Got a number in mind? Okay, now I challenge you to increase that amount by 10%. (20% is even better!). Please don’t dismiss this challenge before you try it. What I have seen work over many years is that if you go ahead and set up the bigger transfer and stick with it for a few months-even if it seems like way too demanding a sum-what you will find is that you adjust to having less money in your checking. Just give it a try. If after three months it’s just too hard to do, then you can ratchet it down a bit.
  5. Aim for an eight month emergency fund. Your long-term goal is to have eight months of living expenses set aside in your emergency fund. I know that’s a lot, but I want you and your loved ones to be okay if you were ever laid off, or sick for an extended period of time. Sure, it could take years to reach your eight-month goal. That’s totally okay. The important issue is that you are starting to save today and so every month you will be moving closer to your goal.
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