Life happens. And usually, it costs money. That is why your very next step on the road to financial freedom is to begin building a starter emergency fund. Before you tackle your debt, before you invests in your 401K, before you do anything else (besides pay your bills and stay current!), you need to put $1000 into the bank for emergencies.
Why have an emergency fund? Most people are one medical emergency away from financial disaster. When your working to get your feet under you financially, your emergency fund will provide a buffer for you during the first difficult months. It will help you avoid getting behind again or going further into debt while you're working so hard to stay current and get out of debt. This fund is just your "starter" fund...eventually you'll want to grow this to 3-6 months worth of living expenses. But that's another step, so for now, let's just concentrate on the $1000.
What constitutes an emergency? That's for you to decide, but I'd recommend that you put it in writing, especially if you're married! Sit down, write out and be in agreement on what you would consider using your emergency money for. Unexpected car repairs, replacing a broken water heater, an unexpected medical bill...are you getting the picture? Emergencies are usually things that are necessary and unexpected. Buying the kids school clothes because they...oh my goodness...grew is NOT an emergency. Christmas gifts are NOT an emergency. A vacation with your friends that came up unexpectedly is NOT an emergency (definitely unexpected, definitely not necessary)! These are things that you know are coming and can (or should!) be planning for.
Where should you keep your emergency fund? Because you want this money available to you on short notice, you need to keep it fairly liquid. For this reason, your standard checking and savings accounts, money market accounts, or even a money market fund (brokerage account) are usually good options. Just be sure you keep it separate from the rest of your money (ie - in a separate account) to avoid spending it inadvertently.
Here's some ideas of how to get that emergency fund in place quickly:
1. Sell some stuff! Most people probably have at least a couple hundred dollars worth of stuff that is just sitting around unused and unwanted. Get rid of it! (Craigslist is free and works great)
2. Take any bonus checks (or tax returns, etc) and put them towards your emergency fund.
3. Work overtime for a couple weeks (if its available) and use the extra for your emergency fund.
4. Some of you get paid every two weeks. How about budgeting for 2 paychecks a month, then when those extra paychecks come as a result of a 5 week month, set it aside for your emergency fund.
5. If all else fails, make some changes in your budget (ie, cut back in a couple areas) to begin putting extra towards your emergency fund.
Happy saving! And don't forget to join us on Wednesday for our next milestone on the Road to Financial Freedom - GETTING OUT OF DEBT.
