The Emergency Fund
A major component to winning financially is having an emergency financial reserve available at all times. And NO, a credit card or home equity line of credit or a quick trip to the local pay-day lender is not considered a good plan for a financial reserve. Instead, these things will only perpetuate the problem over the long haul and will cause even greater financial hardship for you and your family in the future. An emergency will occur– whether it is great or small– and it is our responsibility to be prepared when it does.
I have mentioned that my wife and I are following Dave Ramsey’s Baby Steps as we work our way out of financial bondage and seek debt freedom. The first step of the baby steps is to create an emergency fund. This is the most important of the all the steps. It is the beginning of a commitment to changing our behaviors and changing the way we relate with money. The emergency fund will offer security and peace the next time an unforeseen event occurs. When financially prepared, an emergency becomes an inconvenience. Get the emergency fund together as-fast-as-possible, sell something or take an extra job if needed. Do not go another day without an emergency financial reserve!
If you have debt– excluding a home mortgage– then the very first thing you need to do is set aside $1,000. This will become your emergency fund. It is only to be used for emergencies. Put it in a safe place that is easy enough to get to when needed, but hard enough to not access when not needed. A savings account or a money market account with check writing abilities is a good place to keep it. Putting the money in an envelope in a safe or a filing cabinet inside the home would also work. If you are debt-free with exception of a home mortgage, then you should increase your emergency fund to 3-6 months of your household expenses. Remember, this money is only for unexpected expenses that were not included in your monthly budget—unexpected visit to the doctor, unexpected car repair, unexpected home repair, etc. When the money from the emergency fund is used, remember to replenish it the next month when you sit down for your budget committee meeting!
How would you feel the next time you or someone in your family got sick and you had to visit the doctor if you had the money available to do it? How about the next time you have a tire blow out or the alternator goes bad? What if you fell and chipped your tooth and had to visit the dentist to have it repaired? Having an emergency reserve fund available will provide greater peace in these instances and greater ability for you and your family to get through them.
I recognize that $1000 is not always enough to cover the unexpected occurrences in our lives. But I promise you that it is better than not having anything at all. My wife and I have received the blessings of being prepared and having an emergency financial reserve available. What was once a very emotional and dramatic event is now a minor inconvenience and something we are able to manage. We feel a tremendous amount of peace and comfort knowing that we have money set aside specifically for when something unforeseeable happens. We’ve dipped into our emergency fund a number of times and have always been able to replenish it the next month.
Having an emergency fund available will give you more power as you strive to become debt-free. No longer will you have to rely on borrowed money or high interest credit cards to get you and your family through the unexpected challenges of life. You cannot get out of debt if you continue to dig out the bottom. Having an emergency fund at your disposal will allow you to continue forward with strength and enjoy freedom from worry.