The best time to start an emergency fund is when you don’t have an emergency.
OK, so that’s really obvious. But it’s true. So if you have some extra money sitting in a bank account or under your mattress, or if you have some extra money in your paycheck that you can set aside, now is the time to do. You can set up a money market account through your bank or credit union, or you can search online for the best savings account rates. But don’t wait too long while you do your research. The important part isn’t to get a phenomenal interest rate, the idea is to put your money in a separate account that you will only use in case of a real financial emergency.
If you have a couple thousand dollars to spare, that might be enough. If not, make sure to fund it regularly using direct deposit. Even if you can only start with a small amount, such as 20 or 40 dollars a week, you will be on the path to a very important type of savings account.
But what if money is tight? Well, an emergency fund might be even more important to keep you out of credit card debt. Even a small emergency fund can be used to offset costs or expenses you didn’t prepare for, ones that you might have been tempted to charge to a credit card.
But how can you set up an emergency fund if money is tight? Again, you don’t need to put in a large amount of money. You can even put 5 or dollars a week into an envelope and put it in a drawer or closet so you don’t see it all the time. In a few months you’ll have enough to pay for most smaller or medium size emergencies. And if you are lucky, in a few years you’ll have a sizable amount saved up.
What if you are having trouble paying your bills or you have a lot of debt? Well, then maybe your money should go towards paying your bills. You definitely don’t want your payments to be late, and you don’t want to sacrifice putting food on the table for an emergency fund. But if you can still spare a few bucks each week, maybe you can use the envelope idea and be able to pay one or two of your monthly bills.
But…whichever path you follow, you need to make sure you don’t use your emergency fund on the wrong things. This is for real emergencies. What qualifies as a real emergency? A trip to the hospital. A car repair. Paying a bill that is about to go to collections. Helping a family member in need (although be careful with this one). If you need to, write down a list of what you think defines an emergency. Then read the list when you are tempted to use the money for something else.
For fun things like a night out, a special piece of clothing, or a night at the movies, you can save for those separately. The two keys that make an emergency fund so powerful is learning how to save, and learning when to spend it. If you can master those 2 concepts, you’ll be on your way to more financial freedom!
Kris Bickell writes for CPAStudyGuides.com and the Yaeger CPA review course. A good accountant can help you manage your money wisely, save money on taxes, and hep you get into good financial shape.