Emergency Fund

One of the initial financial goals I would recommend to people is to set up an emergency fund. This may seem counter-intuitive, especially if they are carrying hefty credit card debt at outrageous interest rates. Wouldn’t the money be better spent paying down the debt? I think a balance between the two is ideal.

Life happens. Your car breaks down and needs a new transmission. A family member or child falls ill and you have to take time off without pay to take care of them. You need to get your wisdom teeth removed and your employer’s health insurance only covers 50%, and you’re responsible for the rest. Or, your company restructures, and you find yourself without a job.

If you are living paycheque to paycheque, you will be scrambling to make ends meet. Without an emergency fund, you will be forced to rely on credit, whether it is from your line of credit, your credit cards, or even those evil cash advance places. These sources may provide the additional funds required make ends meet in the short term, but you may end up paying for those expenses for years to come.

How much?

Experts usually recommend 3-6 months of living expenses. How much is that? If you have a budget, you would know exactly how much money you would want to target for this account.  :P If you have never had an emergency fund, start with whatever you can. Set up an account that will automatically withdraw a certain amount from every paycheque. Even $20 helps. See if you can slowly increase this amount once you get a better handle on your finances.

WARNING

The biggest issue with a hefty emergency fund is that the definition of emergencies becomes more and more interesting.

Example 1. Problem: I am so stressed!

Solution: I need to head to Vegas or to the beach somewhere hot.

Reality: I want to party. This is not an emergency.

Example 2. Problem: I want to save money but still have fun!

Solution: I should buy a hot tub or a pool table. I will spend more time at home with friends and save money!

Reality: I want to party. This is not an emergency.

Example 3. Problem: I have been working sooooo hard!

Solution: I deserve a new outfit or a new tv or a day at the spa.

Reality: THIS IS NOT AN EMERGENCY

You get the idea. Ultimately, the goal with an emergency fund is to have a bit of money set aside in case sh*t happens. It will happen. But when it does, you won’t have to rely solely on credit to deal with it.

Do you currently have money set aside for an emergency fund? Would this be a good thing to add to your list of financial goals this year?

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