I was only backing out of my driveway. I hadn't even reached the road yet...CRASH! A vehicle parked behind me, which I blindly failed to notice, was the victim of my negligence. Emergencies happen. We can't predict what's going to happen today, let alone predict the unexpected expenses that pop up. But, if a blown tire or a small accident would send you spiraling into debt, it's time to think about an Emergency Fund...an E-Fund.
First, let's define an E-Fund by what it is not: a savings account. An E-Fund and your savings should be separate. The reason for this? If you need money for an emergency, and you have combined your savings and your e-fund, then you will be dipping into your savings, and potentially emptying that account, too. Save separately.
First Things First, Determine How Much You Need.
It is ideal to save four to seven months' worth of expenses. Keep in mind that this money is only to be used in emergency situations. In other words, you won't be funding your next vacation out of this account. Start with a small number, like $500 or $1,000, and try to build your way up from there.
Side note: No matter what your income is, building a savings and an E-Fund is possible if you budget wisely. Here's how to make budgeting easier.
What's Next? Decide Where You Will Keep The Fund.
Making the funds too easily accessible can be dangerously tempting. Opening an account at a different financial institution can serve as a mental block from accessing the E-Fund. When opening your new account, make sure to choose a fee-free account. Your credit union will have great options!
Make It Happen, Treat It Like You Would A Bill.
I know...adding another bill to the mix is anything but appealing. However, if you treat building your E-Fund as you would a bill, you're more likely to be successful in building it up. Remember, it's only helping you in the long-run! Try putting yourself on a regular payment schedule. For example: every third Monday, deposit $10 into the account (it doesn't have to be much!)
Know The Difference Between an Emergency, and a Non-Emergency.
Many people use the E-Fund for yearly, one-time expenses. Don't get into that habit! One-time expenses are not emergencies. Anything you can foresee as an expense, should have a separate budget. The E-Fund should be exclusive to emergencies, which are things that you cannot foresee. Some examples? The car breaking down and needing a new part; appliances that stop working and needing to get replacements; a long illness; or getting laid off from work.
Last But Not Least, Take Your Time.
Building up your E-Fund isn't going to happen overnight (unless you're already on top of this!). If you can deposit $5 a week into your savings, that's only $20 a month. And at the end of the year, your account will grow to $260. If you can deposit $10 a week, your account will be $520 by the end of the year. While it may not seem like much, a few hundred dollars can protect you from seeking alternative means of paying off an unexpected expense. It can mean the difference between (1) accruing interest or added expenses, and (2) saving yourself the headache of a difficult financial situation!
Read More: Bankrate.com