What is an Emergency Fund?
Investopedia.com define it as follows:
Emergency Fund – An account that is used to set aside funds to be used in an emergency, such as the loss of a job, an illness or a major expense. The purpose of the fund is to improve financial security by creating a safety net of funds that can be used to meet emergency expenses as well as reduce the need to use high interest debt, such as credit cards, as a last resort.
We hear a lot about saving for an Emergency Fund these days, but rarely hear ways to help those who are struggling with periodic dips into their EF for non-emergency reasons! If that is what you need… today is your lucky day!
When my wife & I started really working hard to cut our expenses and begin saving, one of the first pieces of advice we kept hearing about was to build an initial emergency fund of $1,000… so we did. What we failed to understand was that it was only for emergencies! Go figure right. After just one or two months of creating the Emergency Fund, we had already dipped into it several times.
You know the story. Couple gets in debt. Couple finally realizes they are in debt. Couple creates budget, begins cutting costs, & establishes very first Emergency Fund. All solid stuff… but because they are new to the whole budgeting thing, the couple’s new budget is still virgin & not fully formed. Therefore, it may not be long before variable, irregular, & other costs — forgotten on the initial budget — begin popping up like crazy, thus overextending their budding budget… and into the Emergency Fund they go! It’s all too familiar…
So What’s The Answer?
Okay… so we should form an Emergency Fund. Got it. But how do we keep from dipping into it?
6 strategies to help you save your Emergency Fund for the true emergencies
1. Define what an emergency is to you
Defining a few concrete reasons why & only why you can access the money may be one of the best strategies around. Taking this step will set boundaries that will either have to be followed or broken… it always helps to set boundaries for proper financial behavior. For my wife & I, an EF withdrawl can only occur in the event of a job loss or health issue. We also established a clause that allows us to discuss spontaneous matters, run them against our priorities, and determine if it is indeed worthy of our EF money.
2. Reserve a large initial amount for miscellaneous
For the first few months while you are forming & tweaking your budget, trying to remember all the little expenses off the top of your head is something that should be reserved for 12 year old geniuses and Jeopardy contestants. Since most of us are neither, it is a good idea to give ourselves some leeway until we get a few months of successful budget tweaking under our belts & have a better feel for what our true budget really is. Looking back, it would have been nice if me & my wife would have allotted between $300 – $500 per month for misc.
3. Keep a spending journal
You may think this is silly, or tedious… but it is really simple and is essential to really nailing down your budget. If you are not fully aware of precisely where your money is going, you will not be able to budget effectively, and hence… will not be able to save any money! Carry this spending journal with you at all times so you can record every penny spent for at least one month (I recommend at least 3 months of record keeping, but 6 is best). Always carrying the journal with you will also help you be able to write down varying expenses as they pop into your mind. You can
4. Thoroughly & continually develop your budget
Perhaps the most common reason people dip into their emergency fund for non-emergency situations is because they forget to add all the expenses to their budget. Many of us have a lot of little expenses that we do not normally have to deal with on a month to month basis — therefore they often slip our mind. Here are some expenses that people often leave off their budget and end up dipping into the EF for:
Regular expenses – auto & life insurance, charitable donations
Irregular expenses – auto maintenance, license plate renewal & auto registration, gifts, medical costs
Variable costs – haircuts, gasoline, household items, bank fees, professional dues, dry cleaning
5. Sacrifice things instead of dipping
Chances are you may be dipping into your EF for something that is not totally necessary. To combat this you can sacrifice something for the cause. I ALWAYS suggest you cancel your TV service, which normally saves the average family between $60 – $140 per month! What other expenses can you cut in order to preserve your EF?
Going out to eat – this was the big one for us, we stopped eating out & are saving around $5,000 yearly
Clothes shopping – chances are you have WAY too many clothes in your closet anyway… c’mon, you know I’m right!
Movies – instead of going to the theater, we just wait for movies to be released on DVD and order via Netflix
Cell phone – lower your cell phone minutes down and begin using Skype over your Internet connection
Eat more beans – we cut over $100 per month from our grocery bill by eating less meat & more beans (ps… this helped us lose weight & is giving us better health)
6. Be Creative to find other ways to avoid dipping – Here are a few creative ways to keep you from dipping into your EF:
Can you ride your bike to work a few days a week to save some money?
Make your EF hard to access. Put it into a bank account that is not easily accessible – give the money to a trusted parent, spouse, sibling, or friend to hold onto for you until you fully develop your budget & discipline. Tell them that you can only request the money for the limited reasons you established in step 1 above.
I wish someone would have given me & my wife this list of tips when we first started saving for our Emergency Fund! We hope this helps you keep your hands out of the cookie jar!
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DFA is passionately dedicated to helping people break the bondage of debt & work toward financial freedom using biblical principles.