Your Emergency Fund: Define “Emergency”
May 2nd, 2006 | by Molly's Brother |Any financial advisor will tell you the same thing. Be it Suze Orman, Dave Ramsey, or any expert that parades across Oprah’s couch: As your emergency fund is being built dollar-by-dollar, you need to have a clearly defined idea as to what exactly constitutes an emergency. By not doing this, you will quickly find yourself overspending and spreading your financial life way too thin. With your emergency fund, you will break the cycle of unnecessary credit card debt. By actually having cash available to spend on emergencies, you will not need to pull out the plastic and continue the cycle–the seemingly unbroken cycle–of credit card debt in your life.
What constitutes an emergency?
Car problems, the unexpected car accident, medical emergencies, plumbing problems, or prolonged unemployment–these are all areas that could be covered by an emergency fund of 3 to 6 months of your living expenses. You should try not to dip into this fund because you wanted to go on that last minute trip to Puerto Vallarta with co-workers or because you really really wanted the jeans on sale.
Learn to say, “No.”
As you are building your fund (or when you have an ample amount saved up), learning to tell yourself “no” is going to be the key to staying true to your financial goals. In fact, in addition to tracking your spending, you should try to create as many obstacles between you and the money in your savings account. To decrease the visits to the ATM, you may think about wrapping your savings account ATM card in a freezer bag and then dip that bag into a bowl of water and place that bowl in your freezer. By freezing your ATM card (not necessarily your check card) and your credit cards, you will have to thaw the ice to gain access to your card. Or put your savings into an online bank. (As I’ve mentioned before, there will be a three to five day delay in your money showing up in your hands.)
Emergencies funds are for one purpose. They are not for trips to Napa Valley for the weekend. They are not for special edition DVDs. They are not for last minute gifts or expensive dinners. Quite simply, emergency funds are FOR EMERGENCIES ONLY.
