subject: Emergency Funds Prepare Us for Life's Surprises [print this page] We are usually good about paying bills and enjoying life, but we sometimes forget to plan ahead for the little things. Since life is full of surprises, we need to be ready for them. When it comes to our finances, emergency funds are critical.Think of the end goalOur ultimate goal should be having at least three to six months' living expenses readily available. We do this so that we can provide for our families in the event that something tragic happens or if we find ourselves unable to work, such as after an accident or a layoff.This means that if our monthly expenses average $2,000, then we should work toward having $6,000 to $12,000 in reserves. This sounds like a lot of money to have sitting around, but we would definitely feel relieved to have it available if the need were ever to arise.Start smallIn the meanwhile, though, we should still have a smaller lump sum in reserves for smaller emergencies, such as if the car needs servicing. If an unexpected emergency arises, there are two things that we want to avoid: (1) pulling out our credit card to cover the expense or (2) paying cash for the emergency and having to put off paying bills or taking care of our household.We want to put together a plan that enables us to build our emergency fund as quickly as possible. While we want to aim for having three to six months' expenses saved up, we can set a beginning goal of maybe $1,000 and intermediate goals of $5,000 or $10,000. These goals provide us with a great start and can be excellent motivational tools toward reaching our bigger end goal.Keep it realHowever, we need to be realistic in how we approach this project. We cannot be so gung-ho about doing this that we try to sacrifice everything to make it happen.The most important thing to keep in mind is that this cannot be a crash diet. Crash diets never work with food, and they won't work with saving our money.Our main goal is moderation, not elimination. Elimination only forces us to crave what we no longer have, and we end up binging and splurging, spending more than we should to compensate for the loss that we are feeling.We should look for areas in our spending where we may not be making the best decisions. If we just cut back in these areas gradually, it will be a more comfortable transition. We don't want to get caught in a yo-yo or see-saw effect.We are looking for consistency as we create our emergency fund. First, we determine what our end goal amount should be. Then, we take the initiative to get started, understanding that reaching smaller goals will ultimately get us to our big goal. Above all, we want to set realistic action steps so that we are able to make changes that will eventually become lifelong habits.
