Wouldn’t it be great to have a large stack of cash sitting there ready to spring into action when you need it the most? When you get caught in a bind, it’s often too late to think about where the money will come from.
That’s when we whip out the credit cards and go into debt to bail us out.
There is an easier way. There is a way to build a sizeable emergency fund without even thinking about it. It will just sit there and build itself as you go on with your busy life.
I know what you may be thinking. This is a ‘how to build an emergency fund’ puff article with some loophole catch at the end to get roped into some scam.
But, the truth is, with a reasonable budget and a properly installed system, anyone can create a sizeable amount of cash without even ever thinking about it.
I’ve used this system over the years to build a sizeable emergency fund.
I’ve also used this same system over the years to save for vacations or even cars I’ve paid for in cash.
By the way, never finance a car.
But for now, let’s concentrate on building an emergency fund without any effort.
How to build an emergency fund; Start with a budget.
The first thing necessary for this to work is you need to have a budget in place.
You’ll need to take at least 10% of your incoming money and be able not to use it for anything. Many people call this ‘pay yourself first.’ Most people recommend at least 20% of your income. But, if you are struggling to live paycheck to paycheck, 10% will be a good start.
When I got my finances rolling well, I saved close to 50% of my income. I had a good-paying job, and I had cut my bills drastically. I wasn’t making a ton of money. I had an average middle-class job I worked at for several years.
The thing that helped me the most was the tenacity to cut my bills and live a frugal lifestyle. I already had a reasonable budget, so I knew where my money was coming from and going to every month. So, as I cut my bills or got raises, I never changed my lifestyle. The extra money in the budget every month went straight into the savings percentage.
How to build an emergency fund; Set up an automated deposit.
There is a good chance you are currently getting your paycheck deposited directly into your bank account. It is getting so popular now it is getting to be the rule rather than the exception. You’ll need to set up a similar system and your bank or credit union with a separate account. I have a couple of recommendations here.
First, I like credit unions over banks because usually they offer better rates on savings and can give more benefits than actual banks. Second, I like online banks better than brick-and-mortar places.
Online banks have less overhead and can provide much better service and again, even better rates. Jump over to Bankrate.com and look at some of the options. They have an excellent site for a ton of financial advice.
The place I use now is a brick-and-mortar credit union. I’ve been with them since I was a kid and have never had any problems. My accounts have been set up there for years and keep growing. Have your bank or credit union set up an automatic transfer of money every month into a separate account.
My credit union opened up a separate account under the same number. So, I have a checking, savings, and emergency fund. I have a certain amount every month pulled directly from my checking account and deposited into my emergency fund.
How to build an emergency fund; Resist the urge to use it.
If you’ve never had a good amount of savings before, the hardest part of creating an emergency fund is going to be resisting the urge to use it.
It will seem like money just burning a hole in your pocket. Just don’t spend it. This is also why I recommend having a budget. A budget will keep you on track and the emergency fund growing.
The first time you need it when the car breaks down or the refrigerator goes on the fritz; you’ll be glad you have it. It’s so nice when you can walk into a store and not have to worry about financing and going into debt for something you need.
As your fund grows, you’ll also notice that it has a lot more power than just an emergency fund. I call mine the ‘NO’ fund. When your life revolves around debt and living paycheck to paycheck, you are a slave to the money.
Having a large emergency fund allows you the freedom to enjoy life more and say ‘NO’ to things you don’t want to do. Do you have a weekend planned with the family and your job is looking for volunteers to work overtime? ‘NO, Sorry, I have plans.’
I think having an emergency fund or maybe a substantial nest egg fund is a critical component of financial freedom and everything it has to offer.
This is a component in designing the life you want to live.
If you want to quit your job and retire early, you will need to adopt a mindset of living below your means and saving. Even if you hit a million-dollar lottery and spend like you have two million, you will be broke in no time.
Till next time, be safe.
Kevin