Planning an Emergency Fund

Financial planning articles and books often recommend that you put away between three months and six months of your expenses into a savings account. On occasion it may even be recommended that you put away between six and twelve months of your average expenses just in case anything should happen. But what if your first emergency is an eleven to eighteen month financial crisis? It really is quite difficult to plan on the emergency situation that will come up and exactly how long it will last. For this reason, it is best that you put yourself in the best possible financial situation and stay there.

An emergency fund can easily provide the financial resources that you need whenever a financial emergency prevents you from earning an income, or consumes your regular household income. Some of these emergencies may include a major illness, loss of income or another type of financial emergency. Minor emergencies also make such financial planning necessary; such as an unexpected home repair or vehicle repair, or medical bills that you did not anticipate. If you want to establish financial security, then planning an emergency fund is absolutely vital.

If you do not have an emergency fund in place, then you may feel compelled to acquire debt instead using a credit card for traditional expenses such as a mortgage, rent or groceries. This new debt can take as many as several years to repay, and interest will be accrued to cost you even more unnecessary expenses. However, if you decide to regularly allocate income to an emergency savings account or a short term savings account, you can contribute significantly to the security in an emergency that the future may eventually bring. In doing so, it is highly recommended that your emergency fund be looked at as an additional bill that needs to be paid, just as any other obligation would be required of you every month.

Here are some tips to keep in mind for planning an emergency fund or emergency savings account.

1 - How much funds should you have?

At least three months of expenses should be stored in your emergency fund, but more is always better. It is vital that you be consistent with your deposits, and only dip into your emergency savings when you absolutely must. Look for high interest sates for such short term savings accounts, so you can let your money make money for you while it is sitting.

2 - Come up with a minimum “comfortable balance” and stick to it.

Once you have reached this, you may also want to begin considering longer term savings accounts.

3 - The amount that is saved from your budgeting can go into your savings goal or your emergency fund, or can be split between the two.

This way you will be achieving your goals in your savings and still contributing to your emergency fund at the same time.

4 - Whenever possible, pad beyond your first few months of expenses when putting together your basic emergency fund.

Keep in mind that the more you plan, the more prepared that you will be when it comes to handling emergencies.

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