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Saving Money for An Emergency Fund

written by: AlexisW•edited by: DaniellaNicole•updated: 9/8/2011

Saving money for an emergency fund is important for everyone at all times. Knowing how much to have in an emergency fund is an important financial planning tool that can prevent financial disaster.

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    The Importance of Saving Money

    Having a savings account for emergencies can prevent financial disaster in the event that you lose your job or experience a situation in which you are unable to work. The same is true if you have an old house, an old car or other items prone to need repair. If you or someone in your family is ill, if a spouse dies or you get divorced, or if you need to stop working to care for infants or other family members, savings can help carry you through until you are able to obtain a more regular source of income. An emergency fund can come in handy any time you experience a shortage in income or an increase in expenses.

    An emergency fund can also help you avoid using your credit cards or incurring debt to pay for emergencies that arise. Avoiding debt by using your emergency savings to cope with unexpected expenses can help you stay on firm financial footing. Keep your emergency fund in an accessible savings account and do not tap into the money unless you have a genuine emergency.

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    How Much Do I Need to Save?

    There is a lot of disagreement among financial experts on how much to save for emergencies. The answer also varies depending on a number of factors.

    Dave Ramsey, an outspoken radio talk show and television show host who teaches a course called Financial Peace University, suggests on his website Dave Ramsey.com, that you should have a starter emergency fund of $1000.00. Ramsey suggests this serve as your emergency fund until you have paid off all of your high interest credit card debt, at which point you should begin building a full savings account for emergencies. While $1000 is a relatively small number to save for serious emergencies, it can certainly be a good starting point and can help you cope with those minor emergencies that crop up in day-to-day life.

    Experts at Kiplinger.com suggest you have three to six months of living expenses saved in order to have a fully funded emergency fund. Living expenses include all those expenses required to sustain your day to day life such as food, mortgage payments, debt payments and any other payments that you absolutely must make each month.

    If you are a freelancer, work in an unstable industry, are single or are the sole breadwinner for your family, you should err on the side of caution and aim to have at least six months of living expenses saved. Otherwise, anywhere between three and six months is appropriate.

    This number will differ for everyone, but you should ensure you are realistic in determining what your actual monthly expenses are when you calculate the amount you plan on saving for emergencies. Track your actual expenses to determine how much you need to live on and then multiply that number by either three or six to determine how much you need.

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    How to Start

    It may seem difficult at first to find the money to save up to six months of living expenses. Remember, though, that you can grow your emergency fund slowly. Begin by opening a savings account. Dave Ramsey recommends using a simple savings account instead of a fancier investment because many people don't want to cash in their fancy investments when an emergency arises, and instead end up using credit cards to cope with the emergency.

    You can open a savings account online or with your local bank. However, although the cash should be readily and easily accessible in the event of an emergency, you don't want it to be too easy to access, as it might be tempting to spend the money when it isn't a true emergency.

    Once the savings account is open, begin making small deposits. You can set a goal of 10 percent of each paycheck, starting with less and working up to it, if need be. If you are currently living paycheck-to-paycheck and don't think you can save, find ways to cut expenses by tracking your spending. Give up cable TV or a cell phone, or anything else that is not absolutely needed. Creating a budget can also help with this step.

    Make your savings automated, so you don't have to manually save each month. Many experts advise "paying yourself first" or transferring the money to your savings account before your other monthly bills are paid. This ensures that you won't spend the money for your emergency fund savings on frivilous purchases. Regadless of whether you pay yourself first or last, automation is the key to success to avoid forgetting to do it or being tempted not to.

    Please be sure to check out the other tips and strategies in Bright Hub's collection of personal and household budgeting guides.

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    References

    Savings Chapter 1. Dave Ramsey. www.daveramsey.com/media/pdf/sample_chapter.pdf

    Why You Need an Emergency Fund. Cameron Huddleston. May 28, 2008. Kiplinger. http://www.kiplinger.com/features/archives/2008/05/why_you_need_emergency_fund.html