The Emergency Fund

This picture is actually targeted for people with hair emergencies, but the topic I'm going to address today is a little more important than that (although, since just about all of my readers are female, I recognize that this does exist and is by no means inconsequential).

A lot of financial guru's such as Dave Ramsey and Suze Orman will tell you that to get out of debt, to have a stable financial plan, or to simply ride out the hard economic times, you must have an emergency fund. And they're right. I teach community education classes for Granite Peaks, and in them (Get Out of Debt & Cash Planning) I teach my students to get an emergency fund. This is the most important, fundamental, key element to getting out of debt and creating a budget.

In order to get out of debt, you MUST have a budget. A budget, as John Maxwell puts it, is "simply telling your money what to do instead of wondering where it went." It doesn't have to be this 15 spreadsheet, 20-hour long lecture on the best things to do with our money. In the class, we go over how to create as simple an extensive budget as we possibly can. But the key part of that is to have an emergency fund.

What most people will do is they'll take the budgeting class and get all excited with their spouse. "Yes! Finally we're gonna take control of our finances!," they shout. Then they create this elaborate budget with money going to all the places they need...except an emergency fund. Then when something unexpected happens (most of us call this LIFE), their budget is busted and they don't want to take the time to create a new one. They give up.

Don't give up. Get an emergency fund. This is YOUR life insurance against life. Because life happens, and it will especially happen if you're not prepared for it. There are two types of emergency funds: temporary and permanent. I actually am not 100% happy with these names, but I'll come up with something better. These work to explain the difference between the emergency funds, though.

A temporary emergency fund is $1,000 ($500 if you make less than $20,000). This emergency fund is temporary. The balance is not meant to stay at $1,000. However, if you're getting out of debt or trying to get your finances in order, this is the bare minimum you need against life. If you're trying to pay stuff off or get ahead, make sure you have $1,000 in the bank. I keep mine in a money market savings account. Keep it somewhere that's not too easy to get to (like your dresser drawer) nor too difficult if you really need it (a CD). A savings account, money market account, or seperate checking account all work just fine. This is for EMERGENCIES ONLY! Money for a pizza does not count as an emergency.

A permanent emergency fund is 3-6 months of expenses. Either adding to or in addition to your temporary EF, figure out how much you pay for each month in expenses. This includes mortgage and car payments, food, utilities, phone bills, and entertainment. How much money do you need to live on each month? Multiply that by 3, then by 6, and your permanent EF should fall somewhere within that range. This is for your long-term emergencies like a loss of a job.

Protect yourself against life. Get an emergency fund.