Why Build an Emergency Fund?

This is a sound choice. Having an emergency savings fund may be the most important difference between those who manage to stay afloat and those who are sinking financially. That’s because maintaining emergency savings of $500 to $1,000 allows you to easily meet unexpected financial challenges such as:

• Repairing the brakes on your car;
• Buying your child a new pair of needed shoes;
• Replacing a broken window in your house;
• Paying for a visit to the doctor when your child has the flu;
• Covering the dental expense of filling a painful cavity;
• Paying for a parking ticket; or
• Flying to visit a sick parent.

The emergency fund not only allows you to cover these expenses, it also gives you the “peace of mind” that you can afford these types of financial emergencies.  Not having an emergency savings fund is an important reason that many individuals borrow too much money at high interest rates.  For example, with emergency savings, Americans probably would not have to take out $2 billion a year in payday loans at interest rates that average 300 to 500 percent.

Where to Keep Emergency Savings

It’s usually best to keep emergency savings in a bank or credit union savings account. These types of accounts offer easier access to your money than certificates of deposit, U.S. Savings Bonds, or mutual funds.

But not too easy. Keeping your money in a savings account makes it much less likely that you will use these savings to pay for everyday, non-emergency expenses. That’s why it is usually a mistake to keep your emergency fund in a checking account.  You may well need at least $100 to open the savings account and a $200 minimum balance to avoid monthly fees. In most areas, however, there are several financial institutions with lower minimums.

How to Find Money to Save

There are many places to find money to save. If you receive a tax refund or Earned Income Tax Credit, use a portion of this money to begin or increase savings. Since the Tax Credits average nearly $2,000, you may be able to open a savings account and still have plenty of money to pay off debts or cover other expenses.

Track your spending by using a physical account ledger to write down where you are spending all your money.  Write down all cash spent by the category in which it is spent as well.  Keep your register at home, in your car, or in your wallet – keep it where you will use it; and it will be easier to use it daily than trying to remember what to write later.

Utilities: Analyze your phone needs.  How many lines do you have and are all of them essential?  Is your cell phone more a novelty or necessity?  You may want to consider using a pre-paid cell phone plan rather than a conventional plan; this will limit your spending if you experience overcharges.

Food: Don’t cut corners on what you love to eat.  Instead, purchase store brands rather than name brands when buying basics.  They are often name brands in disguise, simply “private labeled” for the particular store.

Transportation: This can be a big block and eat up to 50% of a spending plan.  Look hard at where you can save and set a plan for transportation.  Look for bargain airfares and limit air travel to only when necessary.  Consider signing up for a car pool for transportation to work.  Get a car that you like and take good care of it.  Cars last longer than they used to as they are better made. 

Credit Cards: The first law of Money Dynamics state that if you have plastic you will use it.  Therefore, do not cut up your credit cards but simply remove them from your wallet and put them in a safe place.  Carry only a debit card and buy only what you can afford.  Get in the habit of spending cash only and jot down everything you spend in your ledger.

spouse or children, they may even help build the account.  And, they will be more likely to understand why it’s more important for you to increase these savings than to pay for expensive gifts at birthdays or Christmas.

Another way to accumulate the $500 to $1,000 of emergency savings is to ask your bank or credit union to automatically transfer funds from checking to savings monthly. Automatic savings is the easiest savings. What you don’t ever see, you may never miss.

For a sample spending plan or consultation on tracking your spending visit www.anewhorizon.org or call A New Horizon, Credit Counseling Services, Inc. at 1-800-556-1548.

Sources: America Saves: http://www.americasaves.org/strategies/emergencies.asp#3