Emergency Funds Need Urgent Care

The stark reality that most people face when they finally start to look at their finances is that their emergency fund needs urgent care. That is, the nest egg that they’ve set aside to handle emergencies or expenses that are outside of their normal and expected expenses is just too small–or worse–doesn’t exist.

What it boils down to is priorities. In order to have an emergency fund, it must be an absolute priority for you. Each and every month must include some provision to get some amount of money set aside. Ideally, the traditional wisdom dictates that you save the money that you want to have in retirement, college savings, and emergency money first, before you even consider paying anything else.

Going to Extremes

The pay yourself first wisdom is a mountain that has already been climbed over. Instead of rehashing it, just understand that you cannot always guarantee when an emergency is going to come up. This makes the pay yourself first concept difficult because often, the emergency comes just as you are on the cusp of putting the money away to save.

Rob Peter

The reality is though, in order to save, you must not simply save that money at the beginning of the month no matter what. You must learn that Paul is much nastier than Peter. And you’d better rob Peter to pay Paul. Paul is your emergency fund in this case. Peter is that nice thing that you really want to do later on in the month or purchase you want to make.

Understand Priorities

Each person has things that they’d like to do with their money. It might be nicer clothes, a vacation, home improvements, shopping trips, grocery shopping, paying the electric bill, etc. Any of these types of expenses can come up at various times in the month. But, being able to spot which ones of these can be “robbed” is critical to building an account.

Lower Standards

By determining some “peters” in your budget that you can rob by either ignoring them for this month or skipping them entirely, you will likely find you have more than enough to put some money into some sort of savings account. And by giving more to your savings, you are really helping yourself in the long run by changing your lifestyle.

By changing the amount of “peters” you are paying, you are actually forcing yourself to live more within your means. This is because those emergencies are nasty and often consume 10-20% of our income, its just unexpected and irregular. Everything from tax bills, to car repairs, to last-minute-trips can easily wipe out significant sums.

In an article/board on MSN Money, I heard this about Emergency Funds: “Your investments are the quarterback of your financial security. An EF is the offensive line- you want it strong enough to ensure that most things won’t land you on your back.” This is the truth. The reality of 6 months of living expenses just isn’t possible for most people. This is simply because people live beyond their means.

Living beyond your means–spending more or just as much as you make each month–is a killer. There is no money to save, and furthermore there is likely an amount of outstanding debt that is accumulating interest. The lifestyle of carrying interest is expensive. Step one to getting back into control is to make saving for emergencies a priority.

Quick Tips
Here are a couple of ideas for you if you find it difficult. If your savings date is the first of each month but you tend to “waste” money at the end of the previous month, simply pay your savings early. Paying bills or savings early once you have the money can be a great way to keep budgets on track and put money to good use without wasting it.

Save in smaller chunks. If you know that you need to save 100 dollars per month, but you get paid 2x per month, you might think about saving in two 50 dollar chunks to make it more manageable.

Automatic deductions from your paycheck are another great way to save automatically.

Quote source.