Take a Step Back From the Edge

What would you do if your transmission went out tomorrow?  If your identity were stolen and your credit frozen, would you be taking the bus to work?  If your uncle offered to sell you his mint condition Ford Mustang for only $5,000, would you be able to come up with the cash?

We’re apt to take many of the great things in our life for granted, up to and including out income.  In our culture, it’s acceptable and a common practice to live right the edge of our income, spending 90, 100, or even 110 percent of our annual income each year.

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A Valuable Heritage

But for centuries (maybe longer), wise people have practiced the discipline of saving money for a rainy day.  Because we don’t know the future, it is necessary to save an emergency fund to have the options and choices we want.

In today’s article we’ll outline what the emergency fund is, why it’s important, and what it’s to be used for.  If you’ll make the decision to adopt this important discipline, you’ll reap the great rewards that wise men and women have been enjoying throughout history.

What’s It For?

The purpose of the emergency fund is to cover expenses that may come that you can’t predict.  Anything you can predict should be included in your monthly budget.  When I first began budgeting, I was tapping my emergency fund every other month, but as we get better at predicting what’s coming, there are fewer times when we need to use the emergency fund at all.  The goal is to have a full emergency fund that is never ever used, but just sits there “just in case!”

Can you estimate how much you spent on car repairs last year?  Take that estimate divided by 12 and this is how much you should allocate each month toward car repairs.  So maybe you’ll allocate $100 to car repairs in your February budget, even if you don’t take the car in.  But if your check engine light goes on in February, you have $200 sitting there, all ready to pay the bill.

If It Can Be Predicted, Figure It Out

Similarly, let’s say you know you want to upgrade your car by $4000, six months from now.  Just divide it out and you’ll find that you need to save $667 per month.  Again, it’s predictable so include it in your budget, not the emergency fund.

Overcome the Little Kid Inside

The tough part is saying no to all the things we’d like to do until the emergency fund is complete, totaling three to six months of your household expenses.  But it’s worth it to have the security; when you really need it and you have the money sitting there, it takes a lot of stress out of the equation.

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