Building an Emergency Fund

It’s been a while since I’ve written any posts regarding personal finance, and I happen to think this is a very important topic.

Yesterday, my wife and I were discussing how and when to pay off my car. That is one of the few debts we still have and one that we decided made sense financially when we bought the car.  We’ve made steady progress in knocking down the principal very quickly and are now at a point where we can pay it off if we want to.

You might be asking yourself, what on earth does paying off a car have to do with an emergency fund?  Nothing directly, but the process of building an emergency fund and savings has allowed us to have the money in savings to pay off the car.

Let’s start with what an emergency fund is not.  In my mind, it is not your living expenses fund for 3-6 months, it is not your vacation savings fund, it is definitely not your 401(k) or retirement savings accounts.  An emergency fund is simply a savings fund that has a reasonable amount of money in it to pay for “emergency” events that occur. (Your own personal circumstances will have to define reasonable)

You know the ones I’m talking about, new tires on the car, broken window in the house, unexpected this that or the other thing.  Those expenses that are unexpected, unplanned and typically not in your budget!  Those are the kinds of expenses that typically result in credit card debt that piles up and takes forever to pay off.

To combat those expenses, you can simply build up and emergency fund.  This is a lot easier than it sounds.  By simply putting away $100 dollars a month you can quickly build up to a $1,200 fund that can cover most of those quick and unexpected expenses.  The side benefit is that once you get in the habit of saving $100 a month, you can begin to roll those savings over to other accounts when your emergency fund is fully funded!

So start stashing away a few dollars here and there.  Just ditching the morning starbucks can fund the emergency fund with no problem!  You’ll be happy you have one the first time you have to replace your tires and can pay cash – trust me