UPDATED November 15th, 2017
Everyone needs to have an Emergency Account with at least $500 in it to deal with the various little emergencies that spring up. No matter how well you plan or how organized you may be, life is unpredictable. Something is always going to go wrong with your car. Your child will come home and tell you that she needs a special something to complete a school project. The dryer will go out or you’ll have to call a plumber. If you don’t have the cash to cover those unexpected expenses, you may have to ask family or friends to borrow money or worse, turn to a payday loan.
What an Emergency Fund Is
An Emergency Fund is exactly what it sounds like. It’s money that you’ve set aside to deal with the unexpected. It’s money that you can have access to quickly. It’s money that will save you money over time because you won’t have to take out a loan, with friends or a financial institution. Right now, you may be thinking that you already have an Emergency Fund. The truth is, you probably don’t.
Why an Emergency Fund is Not a Savings Account
When you opened your checking account at your credit union or bank, you more than likely also opened a savings account. You may have had some money stashed away there, but ended up spending it.
The point of a savings account is not to save, it’s to create a cushion for your checking account. The savings account is usually linked to the checking account through your ATM card. When you want to spend more money that you have available in your checking account, you don’t worry because you know that the financial institution will pull the amount necessary from your savings account. That sounds great, until you realize it’s also the reason why you rarely end up saving money in your savings account.
Read Related: 6 Steps to Creating a Foundation for Wealth
Tips for Building an Emergency Fund
Start Small: Don’t worry if you can’t put in the $500 in one lump sum to start. Start putting away a few dollars here and there until you reach at least $500, or higher if you prefer. Creating the habit of saving is what’s important.
Set it Aside: Make sure that your account for your Emergency Fund is not connected to the ATM card you usually use. This money is only to be used when all other resources are exhausted. For example: open this account at a brick-and-mortar credit union or bank that isn’t where you have your regular accounts or open up an account online so you won’t be tempted to touch it.
Create Work-Arounds: Everyone has weaknesses. It’s important that you are aware of yours so that you can create ways to avoid your challenges. For example: don’t get an ATM card for your Emergency Fund account. If you want the money you’ll have to go down to the credit union, stand in line, fill out a withdrawal slip, take money out from a teller. Going through all the extra effort might be enough to dissuade you from spending the money on frivolities.
Build it Back Up: After you’ve used the money in your Emergency Account for an emergency, you have to start building it back up. You know that something else will happen, but you’re ready for it. You have a habit of earmarking money specifically for this account now.
The next time something unpredictable happens, you’ll be ready. You’ll pull a few dollars out of your Emergency Fund, thank goodness that you have one, and move on with your life. No worries about where the money will come from, no taking out a payday loan, and you’ve corrected whatever went wrong. And, of course, you’ll replenish that emergency fund so that you’re ready to deal with the next unexpected surprise that comes along.
