When Money Is Tight, An Emergency Fund Can Save The Day

By Brian O'Connell | December 13, 2011 AAA

It's ironic when you think about it. People don't think about emergency funds until they need one. Don't let that happen to you. Here are some key steps to take to start – and to maximums – your emergency savings fund. (For more, read Building An Emergency Fund.)



TUTORIAL: Budgeting Basics



First some facts, a 2011 study from the National Foundation for Credit Counseling (NFCC) says that 33% of Americans don't have an emergency savings account – defined by the NFCC as an account with $1,000 or more stashed inside. Another study, this one from the National Bureau of Economic Research (NBER), says the problem is even more severe. The NBER says that only 50% of all American adults could come up with $2,000 "in a pinch."

The fact is, a big car repair bill, a medical emergency or the sudden loss of a job can trigger the need for such an emergency fund – and the smart money says that you'd better have one if financial trouble comes calling (and sooner or later, it usually does). So what's the best way to launch your own emergency fund campaign? (For related reading, see Why You Absolutely Need An Emergency Fund.)

Try these tips for starters:

Don't Bite off More Than You Can Chew
You know the old saying, "inch by inch, life's a cinch. But yard by yard, life is hard." So think small when you're starting a new savings fund. Even $25 or $30 per week is nothing to sneeze at. The important thing is to get in the habit of saving. Once you have a grip on that, tweaking the amount isn't as difficult as you might think.

Leverage Your Bank
Ask your bank to set up an automatic savings deduction from your paycheck. Economists call this "paying yourself first." Once you have a set amount (again, it doesn't have to be a big number) deducted from your paycheck and popped into a separate savings account before you know it, you won't even miss the money.

Add Your Emergency Savings Account to Your Budgetary "to Do" List
Here's a creative tip – treat your emergency fund as a regular bill that must be paid, just like your mortgage or utility bill. When you sit down to pay your bills, add "emergency fund" to your list. If you want to get really creative, invoice yourself and set a date every month where that "bill" must be paid.

Don't Spend a Raise or Bonus
There's no federal law that says you have to spend a raise, bonus or other financial windfall. Take the cash and put it into your emergency fund. Do that, instead of buying that new smartphone or those season tickets to the Knicks, and you'll sleep a lot better at night.

Put Your Spare Change to Good Use
Take a container, a big beer mug or empty pickle jar and clean it out. Then, every time you empty your pockets, put the change into the container. Do this for 30 days and you'll have a big addition to your emergency savings account. You can also make it a point not to carry $1 bills in your wallet or purse. Instead, stick those bills into your savings jar – they'll add up.

The Bottom Line
There's a reason financial professionals call them "emergency funds." You don't want to get caught if one happens to you – and your emergency fund is all tapped out.
If that happens, your personal financial situation could get all tapped out, too. (To help start a budget with an emergency fund, check out 6 Months To A Better Budget.)

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