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Sunday, August 7, 2011

Emergency! No Problem.



I have referred to an emergency fund in the post “All the Cool People Do It! Give Budgeting a Try!”  An emergency fund is very important, especially when you are in college and on a budget.  Life can be unpredictable and having a safety net in the form of a savings account will give you a huge advantage.

So how do you put together an emergency fund?  The best way to do this is to include savings as a budgeted item when you put a budget together.  Make sure that you don’t spend the money that you should put into your emergency fund on something else!  The best way to avoid this is to put your money in a separate savings account which is not attached to your checking account.  


You might think that this is inconvenient; that’s the point.  If you have to go to the bank to take money out of the account, then you will be less likely to spend money on non-emergencies.  You don’t have to go to the bank every paycheck in order to deposit money.  If you receive direct deposit with your job there is always an option to split your paycheck into more than one account.   You can choose to direct a certain percentage, or a certain dollar amount of your paycheck into your emergency savings and the rest can go into your checking account.  You can also take advantage of automatic savings transfers that some banks offer. Some banks will also allow you to transfer money online. This way you don’t have to worry about accidentally spending your emergency fund money!


So how do you know when you should use your emergency fund?  An emergency fund should cover unexpected expenses that affect your ability to live life normally.  Situations should be severe such as if you lose your job, have unexpected major health problems (like broken arm, appendicitis, or cancer), or suddenly lose a roommate.


An emergency fund should not be used to pay for infrequent expenses that should be anticipated.  The following are situations where an emergency fund should not be touched: Car breaks down, car registration, moving costs, insurance premiums, textbooks, travel, etc.  These are important situations where money should be put aside in advance.  Money for these expenses can be anticipated and added to your monthly budget.  One good place to put this money is the savings account attached to your checking account, or creating another separate savings account for just these funds.


How much should I put in my emergency fund?  A good starting amount to shoot for is $500.00.  Once you hit that goal then $1,000.00.  Your ultimate goal should be at least 9 months of living expenses.  This might take a long time so don’t get discouraged. It may take a few years to ultimately reach your ultimate goal, but the peace of mind will be well worth it. Just break up your ultimate goal into mini goals of $500.00 increments and celebrate each time you reach your mini goals. 
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