11 April 2012

How to Start an Emergency Fund

An Emergency Fund is an essential part of living the Cheapskates way. Cheapskaters aim to live life debt free, so having a back-up of cash to enable them to survive a financial emergency is important. I used to suggest that three months of total living expenses would be adequate. Since the GFC I have upped that amount to at least six months, preferably twelve months, of total living expenses.
I know it is tempting to put all your spare cash into paying down debt and that is admirable. And I am often asked why I insist on building an Emergency Fund before Cheapskaters are debt free. The answer is simple.

When you put every spare cent you have into debt reduction, you have no buffer for emergencies. That means that if the washing machine stops or the car needs major mechanical repairs or you lose your job you have to resort to credit to survive. And that puts you right back where you started, on the debt-go-round.

If you have faithfully built an Emergency Fund as well as paying down debt you can get a new washing machine or pay for the car repairs or continue to live by using your Emergency Fund AND you'll be able to continue your debt reduction plan.

Building an Emergency fund is simple, everyone can and should do it.

Step 1. Open a new savings account. You should aim to have a minimum of six months total living expenses in this account in case of emergency. Look for a fee free account that pays interest. Most banks have some kind of "loyalty" savings account, find the one that has the best interest rate and lowest fees that suits you.

Step 2.  Divert funds. Remember the 10-10-80 plan? The second '10' is the savings - aim to save 10 percent of your income. Have it automatically transferred into your Emergency Fund each pay day. It may take you a week or two to get used to having a few dollars less to spend each pay, but it won't be long and you won't miss it at all.  If you find you do, then learn to make do with what you have. Making a few tiny budgetary adjustments, such as driving a little less or making your cappuccino at home may seem inconsequential on their own but put them all together and they make a big difference.

Step 3. Pat yourself on the back. Check your savings a few times a year to make sure they are growing at an adequate rate and rest easy knowing you will be able to cope with a financial emergency without resorting to credit or getting into debt.

3 comments:

  1. Hi Cath, I'm about to re do my budget and was wondering, what is the 10-10-80 rule?
    Thanks, Jess

    ReplyDelete
  2. Hi cath
    I'm wondering what is the emergency fund too/
    Betty

    ReplyDelete
  3. Yes, I'd like to know what the 10-10-80 rule is as well ~ thank you

    ReplyDelete

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