Initial Emergency Fund Tips
If you have decided that you want to be debt free and have begun working on your budget, setting up an Initial Emergency Fund should be one of the first things you do.
Note: This fund is not to be confused with the three to six months of living expenses that you will want to set up once you have eliminated your consumer debt.
Why an Initial Emergency Fund?
In the real world, stuff happens: cars break down, furnaces need fixing, and dogs chase porcupines. Without the buffer of an Emergency Fund – anyone of these disasters can throw you off your budget, and lead you into more debt.
With an Emergency Fund – many of these ‘disasters’ are minor bumps in the road that can be fairly easy to deal with.
Your Emergency Fund puts you in control and helps to reduce some of life’s stresses.
Emergency Fund Size, How Much should I have?
Depending on your situation, an Initial Emergency Fund should be a set amount of usually between $500 and $1,500 – which you will leave in a separate account in your bank until a ‘real’ emergency comes along.
Before you begin working on your other financial goals, you need to fill up your Initial Emergency Fund. You will, of course, continue to make all the required payments you have identified in your budget, as you build your fund.
When To Use
To make this work, you need to sit down and establish what a real emergency is, before one comes up. That way, you will know when to use the fund. For example; a great sale on shoes, or a real deal on a new electronic toy are simply not emergencies – but, suddenly having to fix your car’s brakes is.
Part of being able to identify a real emergency is financial maturity – learning the difference between wants and needs.
How To Use
If you are forced (by a ‘real’ emergency) to use all or part of your Initial Emergency Fund, you must replenish it as soon as possible. To do that, put the money you would have put towards your other financial goals into your Emergency Fund until it is back up to full level.
What is in it for you?
- A bit of security in a scary world.
- Increased control over parts of your life.
- Reduced stress.
- Proof that you are on the right track to being debt free.
