subject: The Emergency Savings Fund- A Guide [print this page] The Emergency Savings Fund- A Guide The Emergency Savings Fund- A Guide
In todays age of uncertainty it is more important then ever to have an emergency savings fund. Most experts recommend that you should have anywhere from 3 to 6 months wages saved in case of an emergency situation wehre you may find your self out of work or unable to work for an extended period of time. Most people dont have anywhere near this amount of money, its amazing how many people making 6 figure incomes cant come up with even an extra few thousand dollars without juggeling credit cards and bank accounts. Establishing an emergency savings fund, is a longterm proposal. In this article I am going to layout a simple way that anyone with an income can find extra money and establish such a fund.
To start I am going to recommend that you establish a fund equivilant to 3 months salary. Once you reach that level of savings it is usually easiest to continue building your fund as you will have established an excellent savings habit by that point. In any event the more money you have saved the better. So 3 months is our first goal. I am assuming you know how much money you make on a weekly or bi weekly basis so figuring out how much you make in 3 months is elementary math.
Once you figure out how much money you need to establish your fund, you will have to figure our how much your expenses are on a monthly basis. In an upcoming article I will cover creating an ongoing personal balance sheat, but the concept is quite simple, figure out how much money you have coming in and how much money you spend. Its important that you create a detailed accounting of how much money you make on a monthly basis and this should include all sources of income. Conversly you need to create an equally detailed account of how much money you spend and you need to cover everything from rent to utility bills to car payments to food and so on. Once you have established exactly how much money you have coming in and exactly how much you have going out, you can make detailed predictions about how much money you will have and when. The point here is that you now have a picture of how much money you have availible and how much you can afford to save each month.
Experts usually recommend saving anywhere from 10% to 20% of your income on a regular basis. If you cant afford to save atleast 10% of your income month to month then you are probably spending too much. Most people have a hard time saving any money let alone a consistent 10%, so how do we go about doing this?
First of all curbing discretionary expenses and the accumulation of high interest debt is a crucial step. Most people spend an unjustified amount of money every pay cheque on things like fast food, alchohol, movies, games, cds, etc. All of these things have an extremely short usefulnes considering how much they cost. Most people could save hundreds of dollars every month by just not eating out as often.
Another thing is that people in general have an infatuation with buying high ticket technology items like TVs, computers, blueray players, phones, cameras, the list goes on. This is a pointless game of chasing something you can never really catch. Unless you plan on spending thousands of dollars every month you can never hope to always have all the latest and greatest gadgets. The same goes for things like clothes, shoes, furniture and appliances.
Finally families usually spend too much money on travelling. While its great to get away on a vacation every now and again to recharge your batteries and relieve stress, vacations are extremely expensive. A family of four can easily go through $5000 in a weeks time. Think how much money you could save by taking a holiday somewhere a bit closer or just taking one trip a year instead of two or three.
When you really look at it, even if you are on a lower income there are many ways to save money. As I illuminated above; most people spend atleast 10% of their income on frivelous purchases, high ticket items they dont need, or over priced holidays. You need to find the value in being careful with your money.
Once you get a grasp of how much money you have coming in, how much you spend and then break down what you are spending it on, you can almost always find a way to set aside 10%.
When you get your pay cheque, you need a way that you can immediately set some money aside before you are tempted to spend it. What usually works best is having some kind of savings account or investment account that is hard to get at. Banks all have investment programs where they can deduct your account every month and put the money into a mutual fund or other investments, this works well for me. If you are more comfortable having the money close by just in case' try something as simple as a piggy bank, just make sure you are discaplined about putting away that 10% every cheque.
