How to Build an Emergency Fund

Why this is important? Most people don't have one. It is the ultimate safety net.

How to Build an Emergency Fund

Why this is important? Most people don't have one. It is the ultimate safety net. If you don't have emergency money, you either create debt or miss payment that service current debt.

A recent study conducted by the Global Financial Literacy Excellence Center at the George Washington University, finds one in three Americans are financially fragile, meaning they are unable to cope with emergency expenses in a short time frame. Said another way, most people don't have an adequate emergency fund. Creating an emergency fund is not rocket science. However, it is a real problem so a "how to" article might just be perfect for the times.

(1) Be intentional about it - Let's face it, saving money into an account that is paying .25% in interest is nothing to get excited about. It is important to shift that focus on why it is important and the consequences for not having one. It comes down to two realities. Either you create new debt or you don't make payments to other debts or even worst something as important as a mortgage or car payment. Yes, an emergency fund is crucial.

(2) How much is enough? Pop Culture FInance wants you to believe that it is 6 months worth of living expenses. I would suggest save the amount that makes you comfortable. You can break up an emergency account into two parts. First you are saving for that unexpected expense that comes up from a car repair to a house repair. Second, you might have to replace an income for a period of time. Determine what makes you comfortable and set that as your goal. There is no right or wrong answer.

(3) Stop Saving for the Long-term until your short-term is set - OK, here is where I might get push back. Pop Culture It never made sense to me to put back money each month into a 401 K plan when you have no money or the saved for the short-term. What good does 100,000's of dollars do for you in the long-term if you can't access it for a short-term emergency? I guess you could always borrow against your 401 K Plan. However, that is not ideal. First save for the short-term. Once that is complete, you can focus on the long-term all day long. If that is still not comfortable, save at least up to the employer match (if you have one) then save the balance for the short-term.

Emergency accounts are oftentimes overlooked. The reality is that they are a crucial part of an overall financial plan.

Comments
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BobBrooks
BobBrooks

Editor

@JosephC - way to teach your kids! The emergency fund gets no respect! lol

JosephC
JosephC

Very important advice. I have tried to get my kids to invest the minimum amount into the 401k to get the company match and not invest anymore until they have at minimum 1 month of living expenses saved up for emergencies; ideally three.

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