The Importance Of An Emergency Fund

Written by admin on April 11th, 2011

Surviving this economy has been tough for a lot of people. Millions of people have lost their jobs which has contributed to millions of people losing their homes, cars, accustomed lifestyles, and much more. I’m no stranger to job loss as I was laid off from a position back in 2005 as a Buyer from a manufacturing company that experienced a sharp decline in orders which resulted in a massive layoff. I was lucky enough to have found a new job within six months of my layoff and I didn’t have to sell off assets to stay afloat. Granted, getting an unemployment check definitely helped but it’s a short-term solution to something that may be a long-term situation.


What kept me mentally and monetarily strong during this time was the fact that I put money into an Emergency Fund on a monthly basis in case anything should happen in regards to my job, health, or anything else where I would need money right away without having to charge or borrow which is something I wanted to stay away from. From watching the news and reading magazine articles and books I have seen that the majority of Americans spend what they make and even borrow to live beyond their means. I found this to be startling. I’m well aware that a lot of us like to keep up with the Jones’s, charge things we feel we can pay off in the near future, upgrade our homes or purchase a home that may be a little out of our price range but still feel comfortable taking on a little more risk for the benefit of our family and so on, but I had no idea people were such super spenders who have no regard for saving.


I feel a lot of people in these situations felt they could borrow from their 401k’s and IRA’s if things got tough but why bother? You get hit with taxes and penalties by doing so and you’re setting yourself up for failure in regards to your retirement plans. I think 401k’s and IRA’s are great investments but I would never borrow from them unless I was absolutely desperate, which is not a position I would ever put myself into. Living within your means is very simple and it allows you to save money in an interest bearing account which will allow you to use this money for emergencies. I feel everyone should have both a regular savings account as well as an emergency fund.


The first step is to pick a bank to open up a savings account that you will call your Emergency Fund. You can do an online search to determine what bank is best suited for you. Each bank offers different interest rates and has different benefits so it is important to do your homework before opening an account. I recommend using an online bank such as ING Direct because you can set up your account easily, earn higher interest rates than your typical brick and mortar bank, and it is more difficult to get your money out if you have a craving to buy something on impulse since it usually takes several days to transfer your money from an online bank to your regular brick and mortar bank.


Once you have opened an account with a bank put your savings on auto-pilot. I have been using a personal budget for two years now and I absolutely love it. I know how much money I have to the penny each and every month which allows me to plan accordingly. It is important to know how much money you’re bringing in every month as well as your fixed monthly expenses. Once you know how much you have left over you should subtract your variable expenses to figure out how much you have left over each month that can be put into a savings account. Most experts agree that you should always pay yourself first so my suggestion is to come up with a monthly figure or percentage of your take home pay that you want to put in your savings account and set up an auto transfer each month (or paycheck) for this amount. I know a lot of people probably feel more comfortable doing it manually but this can be a big mistake since it makes it easier to spend these funds rather than put them in an Emergency Fund which is not good.


In closing, I know everyone’s financial situations are different but this is no excuse for not putting away money in case something happens. Your Emergency Fund should be completely separate from a regular Savings Account and these fund should not be touched unless absolutely necessary. You’ll find that by having this money you’ll have less stress and learn to become more financially responsible going forward.

Tags: , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , ,

Leave a Reply