Emergency Funds

Emergency Funds come in multiple varieties, kind of like the flu.  I want to hit the two main type of emergency funds and what role they play in your managing your personal finance and building wealth.

I like to call my version of emergency funds  The Super-Duper Emergency Fund.  When you give the fund a name then it provides it with more respect than just calling it a savings account.

The first type of emergency fund is a small one you establish after you finish the first two parts of my plan for your financial resuscitation.

The first two parts are:

• planning/goal setting-deciding where you want/need to go with your money.
• establishing your Financial Intake Assessment-the facts on your net worth.

Let’s try this scenario: Your financial assessment confirms you are up to your eyeballs in debt-mostly credit card and student loans.

Yea, maybe you regret buying pizza and beer for all your friends, and adding it to the student loan-maybe that wasn’t the smartest thing you ever did.

Then your first step in wealth building is putting as much money as fast as  you can in an emergency fund.  It needs to be in a bank account, probably a money market savings account, that is not easily accessible for you to get into without an important reason..  Once you have put at least 750-1500 bucks, depending on your bills and debt load, then start paying off debt as quickly as possible.

The emergency fund-the cushion between you and disaster

The purpose of the emergency fund is to give you a cushion during your early months of paying off debt.  Science has shown that it takes at least 3 months of  a new activity to become a habit.  Controlling your spending and paying off debt will definitely be a new activity for some-and will take a while to become a non-painful habit.  Those yearnings to hit the mall, go on vacation, eat out will all be calling to you-resist you must!

The emergency fund is for those days that Satan is sitting on your shoulder saying-”I will show this guy- hethinks getting out of debt is easy”-BANG-their goes the transmission!  POW-their goes the air conditioning, hot water heater…. you get the idea.  Life does not occur in a straight line-if you have no cushion in your emergency fund, every time you make an extra payment on your credit card debt, then an emergency comes up-out comes the credit card-their goes your getting out of debt momentum.

So the purpose of the Super-Duper Emergency Fund is to give your debt reducing efforts a little cushion so you don’t get derailed with every little speed-bump in the road.  Most people don’t get in debt over night, and it will take months, occasionally years to get out of debt-you know life will hit you with a financial surprise or two along the way-so be prepared.

I will discuss the longer term emergency fund in another post.  It has a few other wrinkles to it.

If you have any questions, comments or suggestions about emergency funds,  and your efforts towards getting out of  debt, let  me hear from you.