Start an Emergency Fund Yesterday (or Today)

If you’ve ever perused a personal finance site or cracked a book about getting out of debt, you’ve heard of the emergency fund.

For those of you who stick to Facebook and sites about animals doing ridiculous things (heh heh), an emergency fund is a special savings account where you set aside anywhere from three to six months of living expenses in case of an emergency.

What constitutes an emergency? Situations like the following:

• You back your car into your garage door.
• Your sickly coworker gives you mono and you’ve already used up your sick days.
• The refrigerator stops working, and duct tape ain’t gonna cut it this time.

In other words, life happens. Inevitably one of these things or something similar will come out of nowhere and slap you in the face and then backhand you in the wallet, too.

What would you do if one of these situations occurred? Cover the expenses with a credit card? If you don’t have money saved to pay, you’ve now got credit card debt. Borrow the money from family or friends? That can be awkward and damage relationships. Take out a payday loan? The lender will gladly provide funds, and charge you an astronomical interest rate, plus fees, for the service.

No, the best solution is to self-insure against disaster with an emergency fund. Are you still stubbornly unconvinced? Here are even more reasons why everyone should set aside money for emergencies:

1. Think you can’t afford to save money? Think again. You can’t afford not to do it. If you can’t set aside a little bit each month toward your emergency fund goal, that means you’re maxed out and/or struggling already. It’s even more critical to have a cushion because one small financial setback could be disastrous for you.
2. Saving is a good habit to start. Often an emergency fund makes people more responsible with their finances. If you don’t think you have money to save, you have to cut back expenses and work within a budget to find it. That alone encourages better money habits.
3. You’ll feel less money-related stress. Living paycheck-to-paycheck is no way to live. If you get sick, you want to rest and get better, not worry about how you’ll afford your prescription drugs. Having money in the bank might just help you sleep a little better at night.
4. You can’t count on assets and investments in an emergency. You might have a rare collection of comic books, but in a true emergency, you won’t have time to sell them on eBay and collect the income. Also, what if the emergency is that your house burns down? Buh-bye investment. Emergency funds are secure, especially when kept at an FDIC-insured financial institution (we’ll go into that in an upcoming post).
5. Stealing from your future is a horrible plan. Take money out of your 401k or withdraw early from your IRA and you’ll pay penalties and set back your retirement savings.
6. You’ll have some protection against unemployment. If you lost your job tomorrow, would you be able to make rent next month? Losing a job is hard enough without worrying how you’ll feed and shelter yourself. It’s exponentially more critical if you have a family to support.

Okay, so you’re convinced, right? Right?!

“But Pageonce blog,” you say, “I don’t have a single dollar to spare at the end of the month! There’s no way I can save that much!”

We’ve got you covered. Next we’ll talk about how to find the money to start an emergency fund of your very own. Stay tuned…