How To Start an Emergency Fund

Developing an emergency fund is important.  It can mean the difference between being able to feed your family or being out in the streets.  In hard times, an emergency fund is more important than ever.  However, many people struggle to develop an emergency fund.  Most people recommend having a 6-12 month emergency fund.  If you do not have an adequate emergency fund yet, here are some tips on how to develop one.

How To Develop An Emergency Fund

The easiest way to develop an emergency fund is to automate it.  That means you should have your employer automatically allocate funds that go straight to your emergency fund.  Most employers have this option.  If your employer doesn’t have this option then you should set up a monthly transfer from your main checking account into your emergency fund account.

The most important thing for an emergency fund is to put a barrier between you and that emergency fund, making it harder to get money out of.  Here are some barriers you should consider if you are one to constantly dig into your emergency fund:

1. Do not have an atm card with your fund.  Having an atm card will increase the likelihood of you using the money for non-emergent issues.
2. Do not have online access to the account.  Online access allows you to easily transfer the emergency fund to your bank account.  If it is truly an emergency, you will spend the time to drive to your bank and wait in line to get money and put it into your non-emergency bank account.

Where To Keep Your Emergency Fund

I personally like to keep an emergency fund in a high yield savings account.  That means you will have to get an online savings account because big banks pay a crap on your savings.  But again, online savings account is not an option if you are one to continuously tap into your emergency fund for non-emergent needs.  Another option you can go is to go to your local credit union.  They will often offer you a higher interest rate than big banks.  For instance, I can earn a little over 1% on my savings account from my local credit union.

I like online savings accounts because they are liquid accounts but they are not immediately available.  So yes, if you can wait a few days, you will be able to get your money.  They key is to keep your emergency fund liquid but not so liquid that you would be tempted to use it at your own disposal.

What Is Considered An Emergency

An emergency fund is useless if you are going to keep taking from it for non-emergent situations.  So then, what is considered an emergency?  Here are things that I would consider an emergency, and therefore okay to withdraw from your emergency fund:

1. Loss of job
2. Paying for a mortgage
3. Death or sickness in the family
4. Paying large medical expenses
5. Paying off ALL/MOST of your debt

Things I would not consider an emergent situation:

1. Bank account running low
2. Need money for birthday presents or other entertainment
3. Small medical bills
4. Credit card bills (in most situations)
5. Investing in a hot stock/business
6. Letting a friend borrow money