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Building Your Emergency Fund: Part I

The goal of an emergency fund is to stay out of debt. When a catastrophe strikes (injury, disability, job loss), you do not have to incur debt to stay afloat. That would put even more pressure on you in the future.

How much do I need?

A good rule of thumb is to have three month’s income (salary, wages or earnings) in reserve for emergencies. Can you forfeit your salary for three months? Most of us cannot. If you work in a high risk job, physically or in terms of maintaining or replacing your job, six months income is the best emergency fund.

Why salary and not cost of my bills?

Like it or not, your bills are not all you pay in a month. You have incidental expenses which you also cover with your salary.

  • A new tire or car repair.
  • Fluctuation in the cost of your bills.
  • Gifts.
  • Home repairs.
  • Medical expenses.

My salary is more than my bills…

That is terrific! Your emergency fund will grow faster. Once your bills are paid, put the rest away for a rainy day. By all means, bank the six months rather than the three.

…But not if I pay credit cards.

If you already have debts, the sooner you eliminate bad debt the better. While you pay off your debts, save a smaller amount. Do not choose one or the other. This will help your credit score and allow you to use credit if your emergency fund has not grown large enough yet.

I do not have that much discipline.

Oh, yes, you do! Write yourself a bill. When you pay your home bills, pay yourself. Even if you are only paying yourself $10 per paycheck, the money will build up.

Next time, we will look into ways to start saving.


See all posts in the Emergency Funds Series.

(c) Ann Marie Dwyer 2011
Reblogging of this or any other post on Momma’s Money Matters is expressly forbidden.
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11 Comments

  1. Would you consider it more important to build your emergency fund OR pay off existing debt? (car loan, mortgage, ect?) We divide our emergency fund into car emergency, general emergency…ect.

    Reply
  2. You will find in Part III (http://mommasmoneymatters.com/saving-money-emergency-funds-3/) I suggest a combination. The two should not be mutually exclusive.

    Part of what you save from your credit cards should be applied to your unsecured debts. Having the credit at your disposal (and not accruing interest) is part of your overall savings and gives extra long term benefits (better credit score, slimmer debt/credit ratio).

    I will always advocate paying off interest-bearing loans (car notes, mortgages) early. Look for a series soon on capitalizing your loans with little more than lunch money.

    Dividing your fund is a terrific idea. It helps you keep tabs on your money and helps you control expenses, even unexpected ones.

    Great questions and I hope to see you again soon!
    Red

    Reply
  3. My wife pays herself every time she finishes a bin bag full of ironing, going rate £15 a bag. This has a two fold effect, she saves some money or I do the ironing and save some money.
    Nigel
    🙂

    Reply
    • What a fabulous system! Must incorporate it into my next series on savings around the house. Red.

      Reply
  4. Hi hun! 🙂

    I put aside £200 per month for bills.

    I need about £120 (this varies) to cover my outgoings, so the rest accumulates.

    My rent is paid Three months ahead in case of problems, which is as well because my housing benefit recently changed to being paid a month in arrears, but I’m still smiling! 🙂

    Everything went up more than my pay rise this year so I have a little less wriggle room, but I still have a margin for extras like bread and milk! 🙂

    This margin also pays for my transport costs when I have to go to get my medication as I am only allowed one months supply as a potential suicide risk with a prior history of deliberate overdose. 🙁

    Micro managing what gets left over every six months usually goes on clothes, footwear etc.

    I also use it to buy soap, toothpaste, brushes and vitamin supplements which are bought every four months, preferably when on sale.

    Small items, but they all add up! 🙂

    Love and hugs!

    Prenin.
    prenin recently posted..Monday – Sleepless in MiddletonMy Profile

    Reply
    • Preaching to the choir, Pren. I go to market once per month, so all of mine is expended in a moment but cuts down on incidental purchases which plague frequent trips to the stores. All the sundry items are purchased then. I go to the grocer weekly for perishables (bread and four to five gallons of milk), but most everything is bought at the beginning or middle of the month in the single trip. I do the same with fuel. I try to stay below two tanks per month when I am not traveling. {HUGZ} Red.

      Reply
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