Establishing an Emergency Fund

Well, the truth is it can happen to any one of us so we have to get prepared. The second concern will be addressed in this discussion. Don’t underestimate your ability to save because in reality, you can start today to build a fund.

Experience being the great teacher that it is put a focus on setting aside money while you are employed for the proverbial “rainy day”. The recommendation is three months of fixed and variable expenses if:

  • You are single with a second source of income
  • You are married and both of you work with a similar income or
  • You are married and only one spouse works but you have a second source of income (income property for example)

What is a second source of income?

  • Alimony (if it is significant I.e. not just a few hundred dollars)
  • You are the beneficiary of a large trust fund
  • You consider yourself “financially well off” I.e. you have substantial investment income and/or other income coming in each month

If the above scenarios don’t apply then use six months as your emergency fund gauge.

Here are some things you can do to establish your emergency fund:

  1. Use a budgeting tool to figure out what your fixed and variable expenses are.
  2. Once you have a good handle on your expenses then determine if you need to multiply by 3 or 6 based on the information I discussed above.
  3. Open a separate account for your fund. Don’t mingle these funds with your day to day checking account, etc. I recommend using a tool like SaveDaily for this account because you can link it to your checking or savings account. You can have as little as $1.00 deducted and invested in your emergency account.
  4. Use systematic investing to build up your emergency account. It works like your 401(k). Again, taking a disciplined approach by having money automatically invested at different times during the month from your checking or money market account is a great way to start..
  5. Be disciplined and vigilant. Think of your emergency fund as untouchable except for those true emergencies like losing a job and/or unexpected healthcare expenses.