Paycheck Chronicles

Building A Base: Emergency Funds

Have you ever bestowed some real wisdom on your child — I mean a pearl so powerful it could transform their very existence— only to be met with a vacant stare? With two kids out of the house and a teenager still in the nest, trust me, I’ve been there.

Now, to make matters worse, the blank-stare syndrome appears to be spreading beyond the ranks of teens to the general population. At least, that’s my conclusion after looking at a recent bankrate.com survey on emergency funds. The results? Nearly 30% of Americans have no emergency savings— zip, nada, nil, nothing. Despite a lot of encouragement for folks to build a robust emergency fund, it’s apparently not gaining a lot of traction. That’s a trend that’s definitely not part of a recipe for financial success.

Well, here’s another shot at it with three reasons why you should start working on this now:

It Can Keep You Out of Debt and Get You Out Of Debt

This is, by far, the best reason to start putting money into a rainy-day fund. Let’s start with “keep you out of debt.” Quite simply, having an emergency fund keeps you from having to break out the credit card when life throws you a curveball. You know what I’m talking about: those times when your car breaks down, your roof starts leaking, you’ve got to make an emergency trip home, or Fido gets sick.

Now let’s look at “get you out of debt.” It may seem counterintuitive, but the first major step on the path to being debt-free is having the safety net provided by a stash of cash. This way, you don’t fall into deeper financial trouble when the unexpected happens.

Even The Seemingly Certain Is Not

I’m not an alarmist, but the threat of a pay disruption for the military has been front-and-center several times over the past few years. A great step toward putting you in the driver’s seat in situations like this is to have cash in the bank. And who knows what else you’re counting on that could go astray?

Sleep Is A Beautiful Thing

Personal finances can create real stress; stress that can interrupt your sleep patterns, disrupt your marriage and take your mind off whatever work is at hand. Try this: Paint your own mental picture of your life with a savings account stocked to the brim and ready to tap. Now hold that thought for a second. I can almost sense your peaceful exhale. Naps are nice, but the value of a good night’s sleep with no hamster wheel of financial frustration keeping you up cannot be overstated.

If your former blank stare has been brought into focus, now’s the time to take action. Where do you start?

First, make saving money a habit. Set up an automatic deposit into a separate savings account specifically earmarked as your emergency fund.

Second, remember why you’re saving. You’re setting aside these funds so they are there when you need them. That means you should use a safe, stable, and liquid vehicle like a savings account. You can shoot for the big returns in long-term investments set aside for far off goals like retirement.

Third, you should aim to have the equivalent of three to six months’ worth of expenses in your emergency fund at all times. But understand that will take time to build. A short-term goal of $500 or $1,000 could be enough to keep you out of trouble if something bad happens.

Finally, put a fence around your emergency fund. Don’t use the money for everyday expenses such as paying bills or hitting the mall. Keep your hands off this stash of cash and use it only when absolutely necessary.

I’ll bet all you have to do is look back over the past few years to find your own examples of where having some cash set aside would have been helpful. But whatever your motivation, get started today.

Posts in this series include:

Introduction:  A Recipe For Financial Success 

Part One:  Preparation:  A Key Ingredient in Financial Progress

Part Two:  A Tried and True Money Golden Rule 

Part Three:  Building A Base:  Emergency Funds (this post)

Part Four:  Save Now For Retirement 

Part Five:  No Fighting for Leftovers 

Part Six:  Tying It All Together 

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