Saturday, January 8, 2011

Emergency Funds

One of the most important aspects of becoming financially independent is having an Emergency Fund (EF). An EF helps to keep you out of debt when the unexpected happens and the unexpected always happens.

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The standard suggestion for building an EF is to set a goal of $1,000, preferably before starting to focus on debt repayment. This is your goal, so if you want to set it higher or lower just make sure you are committed and comfortable. $1,000 sets a foundation for your EF and teaches you discipline when reaching your goals.

How does one build their very own EF?

It’s relatively easy actually, just requires some stick-to-itness…

1. Find a bank (online or brick and mortar) that you feel comfortable with. You can open a savings account with the bank you are currently with but online banks usually offer higher interest rates. Online banks like ING offer another advantage besides higher interest rates; it is usually more difficult to actually touch your money. ING usually takes 3 days for money to transfer back and forth – so keep that in mind. I think this is good because if I have immediate access I am more likely to spend it. Here is a nice list of online banks to help you get started.

2. Once you have a place to store your money, start saving. Set up automatic deposits from your checking account to the savings account. Start with $20 or $50, whatever is comfortable for you, and make sure to set the deposit date for the day you get paid. You will get use to “not” having this money and won’t miss it after awhile.

3. Don’t touch it! Unless it’s an emergency, of course.

4. You will hit your goal before you know it, but don’t stop saving. Now, you can begin to focus on debt repayment.

5. After you have the first goal met, the next goal is to save 3-6 months worth of living expenses. Some personal finance experts say that in today’s economy a good EF consists of 12 months of living expenses, but that’s a huge number and very intimidating. Just keep focusing on saving after you reach your first goal and you should be good.

My EF is with ING, but I also have savings accounts set up for a house, new vehicle, vacation and wedding. The way ING is set up, you can monitor each account on one page. It’s pretty user friendly, which is why I haven’t taken my money someplace else when the interest rates dropped (as they did everywhere). I am back to the $1,000 goal before I focus on building up the rest.

After my financial meltdown of the last year, I finally understand the importance of having an EF. I’m pretty mad at myself for going through this, when things weren’t exactly on emergency status. But all I can do is learn from my mistake and move on.

I can see my financial independence from under all this mess, I hope you can too. Don’t forget, we are in this journey together…

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