How to Create an Emergency Fund

By Mika Hamilton

“There are plenty of ways to get ahead. The first is so basic I'm almost embarrassed to say it: spend less than you earn.” -Paul Clitheroe

An emergency fund is extremely important for your family and yourself. Unlike the luxuries we often splurge on, an emergency fund can make the difference between foreclosure and keeping your house. Most financial advisors suggest that an emergency fund should have enough money in it to cover at least 3 months of household expenses. However, six months of expenses is even better. Currently, you may wonder why on earth you would need save 6 months of expenses. However life can throw you some curve balls. Unemployment, unexpected medical bills, natural disasters or an auto accident are all events that no one can predict and that can cause you, to not be able to work. Your first step in building an emergency plan is finding out how much money you will need to put into your fund.

The yearly expenses of an average consumer are estimated at $40,000. Individual expenses may vary and emergency funds should be customized to your situation. For a family that has $40,000 dollars in yearly expenses, an emergency fund of $20,000 dollars is recommended. Overwhelmed? Yes that is a huge amount of money and even at 3 months, we are still talking about ten grand. Take a deep breath! You do not have to save this money over night! You may be asking yourself, “do you I need to put away that much money?” and the answer is yes. What happens if your car breaks and you can not get to work? What if you need a new roof? Or your wife needs emergency medical care? Do you have the money today to pay for this important yet unexpected expenses? Start with figuring out your monthly expenses and multiplying it by 3.

Three months should be your first goal and is a little easier to achieve. This is how much money you will need to save and it should be close to 65% of your net income each month. For a five year plan the average consumer will have to place just under $170 dollars a month into a savings account. For a 30 month plan, 2 ½ years, you would need to save just under $340 dollars per month. Emergency fund money should be place in a high yield money market account. Make sure you can draw checks or use a debit card on the account in case of an emergency. This money should not be touched under any circumstance. No matter how badly you want those high shoes or that big screen television. An emergency fund can be your lifeline especially if you are out of work. Do not underestimate the power of saving and the value of preparedness.

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