Emergency Funds

Save for a Rainy Day and Eliminate the Need for Emergency Loans.

Life is pretty unpredictable, wouldn’t you agree? It seems that just when you can’t squeeze any more money out of your bank account the most unexpected emergencies pop up – maybe your car breaks down, your furnace quits on you, or you get sick and need to shill out for medication.

It’s true that financial emergencies can take us off guard once in a while, but your personal budget really should take into account the unforeseen. No we don’t expect our cars to break down, our refrigerators to blow, our kids to get sick or our cars to get towed, however that’s no excuse for being totally unprepared for life’s unexpected financial curve balls. We should all be saving for a rainy day…or in other words preparing our budgets for these types of emergencies.

If you don’t have an emergency fund saved up for the unexpected financial occurrence what will you do? Will you reach for your credit card to pay them off? Or will you look for a payday loan or cash advance in the face of financial tabulations?

Many would turn to a payday loan, and here’s why that’s a bad idea:

Payday loan cash advances, are quickie loans that you can apply for in between paychecks. These should only be seen as one-time shots to bail you out of a financial mess when all of your other sources are depleted – you have no credit card, no one can wire you money, the emergency exceeds the money in your savings account – because if you get used to the quick and convenient payday loan, you will start using them more and more frequently to pay for so-called emergencies and items that you don’t absolutely need. And as a result you will sink deeper and deeper into the bad credit trap when you borrow more than you can pay back or when you can’t keep up with the insane interest rates (up to 25%) tacked on to payday loans.

Sure a payday loan seems the quick and easy solution to get you out of the money trap, but once you get on the cash advance roller coaster – it’s mighty hard to get your feet back on financial solid ground.

That’s why creating an emergency fund for such situations is a wise idea. With an emergency fund you will never have to board the payday loan roller coaster…trust me it will just make you loose your lunch anyhow. An emergency fund will keep your feet on the ground during a financial emergency, because you can turn to it instead of maxing out your credit cards, begging friends and employers for money and heading straight to the payday loan center. An emergency fund keeps you financially independent and able to bail yourself out when times are tough.

Saving your own emergency fund just takes a little planning. This bulk emergency savings will be your rescuer when financial disasters strike. Just think how nice it would be to have money on hand if your water heater broke, your car needed repairs or the pipes in your home burst? An emergency fund will soften the blow of this type of disaster, so that your other financial responsibilities won’t suffer as a result.

Here are my top tips for saving that emergency fund:

Evaluate your spending – Look at your bank and credit card statements to identify any unforeseen emergency expenses – car repairs, medical bills, home repairs – and include these in your yearly budget. For example if you had to pay $1,000 to fix your furnace last year, figure $1,000 of home repair expenses into next year’s budget. Setting aside this money ahead of time will prevent financial disasters.

Add up planned expenses – These include everything from license plate renewals, car insurance payments, property taxes, regular medications, insurance premiums, yearly vacation, average grocery bill, utility bills, phone bills and birthdays. These expenses should be already in your budget, but sometimes they can cost a little more due to unforeseen circumstances – for instance your car insurance premiums go up due to an accident. Put aside some emergency funds for these as well.

Get a calendar – and use it! Put all of your anticipated expenses on a wall or electronic calculator (wherever you’ll look at it every day) as a constant reminder of upcoming bills. For instance, if your car insurance is due in August put it on the calendar. Then when your rent comes due August 1st you will know you need to curb your spending to pay for both. A calendar is a great financial tool.

Put the money in a savings account for a rainy day – If you don’t have a savings account what will you do when a financial emergency arises? Probably charge it to your credit card right? You will be charged up to 18% interest on your credit card debt come bill time, but if you had put the money in a savings account you would be charged 0% interest because you’d have the cash to pay it off. The money in your savings account can also go towards paying off your credit cards and personal loans and improving your credit score.

So you’ve done the budgeting, you’ve got a wall calendar with all of your yearly expenses penciled in, and you’ve opened a savings account, but don’t pat yourself on the back just yet! You need to save, save, save that emergency fund. Easier said then done right?

Here are a few of my quick money savings tips:

Bill yourself an emergency fund - When people are set on a budget they almost always pay their bills in full and on time. That’s because they are aware of the payment and make financial concessions for it. So why not add an extra expense to your monthly budget in the form of an emergency fund payment? I organized this with my financial planner. I asked her to take $100 out of my savings account ($50 on every paycheck deposit date), and to put it into my short-term savings investment. I chose a short-term savings with high interest, so this money adds up quickly.

Make small sacrifices – Do you buy a coffee every morning? Do you buy your lunch ever day? Meals out cost a fortune. Think about it like this, if you purchase lunch for $10 every day – that’s $50 per week and $200 per month! However if you bring your lunch to work you can put that $200 a month into emergency savings. Check out more easy money saving tips in my article Secure Your Credit.

Half for you – half for me – You like to celebrate when you get a raise or a bonus at work, but what if you took half for yourself to celebrate, and put the other half in your emergency savings. That way you can celebrate later when you don’t go into debt when you have to buy a new car.

Savings as savings does – Forest Gump was right, we learn by example – especially when we’re children. So ask the whole family to help you save for a rainy day. Instead of your weekly Kentucky Fried Chicken feast, get together and make a meal you can all enjoy. Also go for a monthly hike and collect beer bottles for exchange money that you can donate to the emergency fund. Better yet, have a yard sale where everyone in the family donates old clothes and toys – all money earned goes to the emergency fund!

Now it’s time to congratulate yourself on funds well saved! Your emergency fund will be thanks enough should an unexpected financial emergency arise.