Why you Need to Start an Emergency Fund

If you believe that having credit cards to deal with life’s emergencies is perfectly all right, you need to start changing your mindset. Relying on plastic to tide you over in case you lose your job is a bad idea. You will be digging your way to even more debt and what happens if you can’t find work in two, three, four, or five months? The credit card bills will continue to mount. How will you pay?

This is why it’s important to actually have a cash emergency fund. Dave Ramsey encourages his readers to start saving $1,000 for use for actual emergencies like getting fired, having an unexpected pregnancy, and getting very sick. He also says that you have to start saving up for this fast.

When you have a cash emergency fund, you actually have money to spend for life’s calamities. These can happen to you any time so it’s always a good idea to be prepared. Take note that your emergency fund must only be earmarked for those real problems that life throws at you and not for those emergencies that we make up.

What are examples of our own made up emergencies? A very common one is a sale at the mall at 50 percent off. You think you absolutely need to have that piece of furniture sold at half the price. Problem is, it’s not in your budget. But you have money stashed in your emergency fund. Stop! A mall sale is not and never will be an emergency. You cannot use your emergency reserves to get that furniture even if it is given at 80 percent off and you don’t have money to buy it.

How to Start Putting Together your Rainy Day Fund

Now that it’s clear that your emergency fund must only be used for real emergencies, it’s time for you to start putting it together. How do you do that and how do you do so in the quickest possible time? There are actually many ways once you get revved up with your savings plan.

If your company allows you to render overtime work (and pays for it, of course) then ask your boss to give you more hours. Work like you’ve never worked before—without sacrificing family time, of course. Try to look around your house for things you don’t need and can sell over on eBay. You can also hold a garage sale in your neighborhood. Remember, one man’s junk is another man’s treasure, so don’t be ashamed to sell your stuff. If you have time for a part-time job then by all means get one. There are many opportunities to do freelance writing online if that is right up your alley.

Another source of money can be found in your budget itself. How much are you earmarking for those restaurant dinners? As you may very well know, eating out is costly. Start making your own meals and eating at home. Brown bag your lunches and make your own dinners. This will give you huge savings on your food money—savings that you can put towards your emergency fund. What about your gasoline expenses? If you can find a way to carpool then do so. Again, money saved here can be put in your emergency fund.

At this point, your neighbors and even some relatives and loved ones might think you’re crazy, but always stay focused on your goal. In a month or less, you should have your first $1,000 for your emergency fund put up.

When you already have your rainy day fund, you need to find a place to keep it. Your money should be readily available for you to use when a real emergency comes up but at the same time it must be inaccessible for those times when you are just making up your own “emergencies.” You can put this in a savings account that is not tied to any of your debts or you can keep it in a secret place at home which only you know how to get to. This takes a little creativity and imagination but the bottom line is to keep your emergency fund safe until such time that you actually need it.

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Saving for your Emergency Fund

The Prerequisites

The first baby step on the road to Total Money Makeover, according to author Dave Ramsey, is to save $1,000 for your emergency fund. This is money earmarked solely for emergencies and nothing else. But before this can be done, you will have to take care of some details. These prerequisites are important because if you don’t accomplish them first, you are not going to accomplish your goal of putting together an emergency fund. A Chinese proverb puts it aptly: “The journey of a thousand miles begins with a single step.”

You can’t be a well-toned athlete overnight. You have to start at the beginning, strengthening your muscles and increasing your stamina with exercises and workouts. You have to watch what you eat as well. Then when your body is ready, your coach can start training you on the specialized techniques and strategies that apply to your sport. The road towards becoming a star athlete has to be taken one step at a time. If you attempt to learn the techniques right away without building your foundation first, you won’t be able to last long enough to get anything substantial from the training. In the end, you will most likely just quit out of sheer desperation.

The same thing applies in your quest to put together your emergency fund. You have to fulfill the following requisites or else you will just end up spending whatever you have placed there for your other non-emergency needs.

First, you need to resolve to be patient. Before you can accomplish all the next steps, you need to make a pact with yourself that no matter how tough the going gets, the more you must strive to be patient. Also, without patience, it’s easy for you to lose focus. At this point when your finances are in disarray, you might want to put your money on something else rather than putting your money in your savings fund.

Second, you have to set up a budget. Yes, this is one of the more challenging things about putting your financial house in order. You have to have a written budget for each month (or for a week, if your pay is given weekly) so that you know where your money goes and will have control over it. Budgeting allows you to track your money and curb your spending.

When you stick to a written budget, you are able to determine the areas where you are leaking money and will be able to do something about it right away. Best of all, a budget enables you to put your spending in order to ensure that you have money allocated for your emergency fund always. Of course, it goes without saying that you have to follow your budget. If you don’t, it’s just going to be something written on paper—a theory with no practical and relevant application to your quest for financial freedom.

Third, review your budget regularly. If you are doing a weekly budget then you have to have a new budget each week. If it is monthly, you have to make a new one each month. Remember, you cannot just be content with one budget no matter how much you think you already have all bases covered. No such thing as a perfect budget exists. There will always be room for adjustments, especially when you have already made headway with your debts and have money left over. If you don’t figure in the excess dough you have in a budget that you must follow, you’ll end up splurging and wasting your cash and missing out on the opportunities to grow your money.

Fourth, make sure that you and your spouse are on the same page financially. This means that if you are married, you have to agree on the budget. If one party does not agree, the other party must listen and both should come to an agreement about all the items in the budget. You have to agree that you will respect the budget and will follow it line by line to the letter. In case something comes up and you need to realign certain items in your financial plan, you have to tell your spouse and again, you have to agree.

Now, it’s very important that when something does come up and you find the need to alter your budget, you have to make it a point to balance what you need to take out. For example, if you need to spend $80 for a minor roof repair, you need to subtract $80 from another part of your budget so that you are still following your plan. Otherwise, you won’t be able to work towards putting your emergency savings together.

The final prerequisite is for you to become current with your creditors. Of course, you will have to take care of the basic necessities like food, shelter, and clothing first but once you have these in place, you have to start paying off your debts. When you are current on all your obligations, you can start saving for your emergency fund.

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Steps to Overcoming Financial Ignorance

Solving your money woes starts with overcoming your financial ignorance. How do you do that? Here are the steps:

First, you have to acknowledge to yourself that you are not a born financial expert. No one is. If you want to be financially savvy, you have to work at it. That means you have to be humble enough to admit that your knowledge about money at this point is zero. A lot of us take offense at being called ignorant because we consider that a blanket term for a lack of knowledge about everything. But as we have discussed above, being financially ignorant is only confined to your lack of knowledge in the area of finances, not in any other area in your life.

You can be the best teacher to preschool children, guiding them in the basics of phonics and reading and simple math every day but that does not always mean that you are a good money manager. You can be the best car mechanic in town but this does not always make you a genius at budgeting money. Again, you are not born with some special innate knowledge about how to handle money. You have to learn that. How do you do that? Read on.

You have to educate yourself about money. No, this does not mean going back to college and learning about the basics of money management here—most colleges don’t include this in their curriculum anyway. It means reading good books about the subject. It means doing online research to scour articles and other related resources that teach you how to manage your wealth. There are literally thousands of websites on the Internet that focus on this topic so you should be able to find one that gives good advice.

As far as finding advice is concerned, just be wary when scouring online sources. A lot of those are from big credit card companies who, of course, want to encourage clients to keep on living on credit. If you are already burdened with debt, the first thing you want to do is free yourself from it so anything that will encourage you to get more and more credit cards is simply not the solution you need.

Third, keep on learning about how to manage money. It is said that the only thing constant in life is change. Although the principles of saving rarely change, other considerations like how you plan your retirement, what your 401k options are, and other federal rules and regulations that affect your bank accounts and other finances could be altered. You have to keep abreast of these happenings so that you will not be left behind and can adjust the way you manage your wealth accordingly. Even your budget has to be reviewed regularly so that you can make the necessary adjustments when something comes up.

Battling the Desire to Keep Up Appearances

One of the really ignorant things you can do is to try to keep up appearances so that you can appear respectable, decent, and likable to your friends, family, and yes, even former high school classmates. Perhaps it’s part of the human psyche that we crave for respect and attention. Most of the time, however, we tend to overdo our desire to “keep up with the Joneses.” Most of the time, we end up broke and in debt even as we dress ourselves outwardly in the most fashionable clothes, the newest cars, and the regular parties we throw to our families and friends. People think we are living the American dream when in fact our financial life is a living nightmare.

If you really want to make a lot of headway with your finances and want to become the next millionaire, you should stop caring about what people think of you and start thinking about what your wallet and your bank account has to say. Are your finances already in the red? Is the electric company threatening to cut off your electricity? If the answer to both questions (and similar ones) are in the affirmative and you still think that you will die if you can’t have the new designer bag that just came out, then your way of thinking needs a major overhaul.

But as we all know, it’s extremely challenging to battle this desire that has been ingrained in our system for so long. After all, we all love our things and whether we admit it or not, we attach our self-worth to them. Thus, it’s understandable that we meet a lot of resistance from ourselves when we try to solve this problem. But winning is possible. Here are some steps to help you change your mindset:

First, you have to really want to change. The first step towards believing that you can become financially stable is to believe that you really want to be. This might seem quite easy at first but in reality, it takes a lot of introspection. If you look deep into your finances and are content with the way you manage your finances now then you won’t be convinced that you need to change. If, however, you see a pauper years from now when you retire and seriously want to avert that, you need to plant the seeds of change now.

Second, you have to stand up to peer pressure. This might seem very high school-ish, but we succumb to pressure from friends, family, and society when we try to live up to their expectations. We are living the way big clothing companies want us to live every time we feel we are left out if we don’t buy their latest creations. We are bowing down to peer pressure every time we feel we ought to bail out a younger (or older) sibling from debt because our family thinks we are well-off even if we are drowning in debt ourselves. You have to learn to say no—and say it even to those you love—if you are serious about straightening out your finances.

Finally, you have to let go of that most important thing you have but cannot afford. If you are up to your neck in financial troubles and the only way out is to sell the business you have worked so hard to put up then you have to do it. The same goes for that car you hold dear, the house, or that rare art collection. Whatever it is, you have to let it go. Only when you have done so will you start the road towards financial freedom.

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