Making Cents: Establishing an Emergency Fund
So, it’s a new year. You made it through the holidays and may have made some resolutions. Did you resolve to lose weight? Did you resolve to spend more time with your family? Or did you resolve to exercise more and eat healthier?
These are all good ideas to start the year off with a goal in mind. What about our finances? Do we really take inventory of our financial picture? Is it unhealthy to have a lot of debt hanging around, perhaps from the Christmas shopping season?
If you have been reading this column from prior months, you have noticed a theme as they all are related to my financial checklist. This month, we are highlighting the need to establish an emergency fund.
The rule of thumb that we use in our household is to have three to six months of our necessary expenses saved and separated from our regular operating bank account. This is ideal in case we lose some or all of our household income. However, to get here, you need to be very frugal with your money if you are in debt or work tirelessly to not have debt payments except your home.
There is not an easy path, but the peace of mind is great. We never had more than a thousand or two sitting in an account while we continued paying on our debt that wasn’t going down in balance very quickly. Then we found a plan that worked for us. We used the debt snowball method from Dave Ramsey.
Using this plan, we paid off our debts from smallest to largest as quickly as possible. It took 22 months to pay off $65,000. It was then we were able to build up an emergency fund that took care of our necessary expenses, should a lay-off occur or we found Murphy knocking at our front door.
At this point, we had to create a list of what must be paid each month in case we had a change in our financial picture. These are items like the utilities, groceries, mortgage or rent and your transportation needs. This list must be realistic and take care of the essentials. Once you figure that monthly amount, multiply it by three and six. That is the range from low to high of what you should save. You as an individual or a couple must decide on the amount that will make the most sense.
There is great peace of mind that comes from having this safety net. I remember using plastic to get by in an emergency, and that expense ends up taking months, if not years, to pay off.
Start the New Year off differently, take stock of where you are financially and identify where you want to be in a year, three, five and maybe 10 years or more. Now that you have that image, are you taking the steps to get there? It’s no different than starting out the New Year with a goal to lose 20 pounds or eat healthier. It’s all about the behavior and the choices we make. That starts now in 2014.
Kate is a financial expert of what to do and not do with money as well as owner of 4 Walls Money Coach, A Coaching-Focused Company. She has attended and completed Dave Ramsey’s Counselor Training. Follow Kate on Twitter 4WFCoach, reach out to her via email at firstname.lastname@example.org or visit www.4wallsmoneycoach.com. Feel free to share ideas or questions for future articles.