Monday, April 28, 2008

The Importance of Having an Emergency Savings Fund

Savings is an important habit to maintain no matter what stage you are at in life. Whether you are a student, recent college graduate, Gen-Xer, Baby Boomer, or retiree. You will need to have money saved up for unexpected expenses--whether they be negative or positive. It could be the birth of your first child, or your car breaking down for the tenth time this year, savings can prepare you for the curveballs life can throw you. It is better to develop good savings habits while you are young, but it is never too late to resolve to save money and reduce debt.

Saving While Paying Off Debt
You should save even while you are paying down consumer debt. This will prevent you from incurring more debt. For example if you are working furiously to pay off your credit cards without saving any money and your roof leaks during spring torrential rain down-pours, you will be forced to use your credit card to fix that leaky roof and incur more debt. Most minor emergencies can be handled with $500-$1,000 in emergency savings. So instead of spending that tax stimulus rebate or refund that you should soon be receiving if you filed your taxes, stash that away to build up that savings cushion quickly. Read this MSN Money article on Why You Need $500 in the Bank for more ways to build this emergency savings quickly.

Once you have paid off your consumer debt, try getting that emergency savings up to at least three months of your living expenses. This could take a while, but it’s important to have a goal in mind so you stay disciplined. The nation's shaky economy should be more incentive to start adding to or opening up that savings account.

What Qualifies As An Emergency?
Everyone's life situation is different, so an emergency for me may just be an inconvenience for you. Some emergencies could include:

-Health Expenses and Prescriptions
-Unexpected Rise In Utility Bills
-Home Maintenance/Improvement (leaky roof, broken water heater, etc)
-Family Tragedies (Funerals, Sickness)
-Car Problems (Only if you cannot get to work, school, etc. by public transportation)
-Child Care

Stop Using those Credit Cards (Unless you pay off balances in full monthly)!!!
This is the only way you will increase your networth and leave more money in your budget to set aside in savings.

Separate Savings for Specific (Non-Emergency) Goals
Whether you are saving for that summer vacation, a new car, a down payment for a home, or your children’s college educations; it is good to save for your goals in life. You don't actually have to have several accounts. Online banks like ING Direct allow you to have separate categories for one account. You can also use this same idea with certificates of deposit (CD's) for savings goals that may be a couple of months to a years off. For those who are more visual, this may help you to see the progress on your savings goals. This way of saving can also force you think more closely about how and what you spend you money on because you won’t have the instant gratification of using a credit cards for purchases.

Make Saving Automatic
Some people are disciplined enough to save consistently every month on their own. But many people including myself will forget about saving if its not done automatically. Have savings taken out our your checking account every pay period and transferred into a separate savings account so you don’t even see the money; this way you won’t be tempted to fritter it away on other things.