Emergency Fund: Necessity or Overrated?

With the Christmas holidays looming, my life has been crazier than crazy: I am lagging in just about every area, every project. Life, work, home – you name it. And it’s not likely to let up for some time! The holiday season can be stressful – but so goes the chaos! And in the world of budgeting, you sometimes have to make room for a little chaos.  Life never completely goes according to plan–the car breaks down, someone loses hours at work, school tuition increases.  Creating an emergency fund sees you through these “what ifs” without dramatically impacting your budget.  In addition, an emergency fund provides a financial cushion – outside of your normal budget – so that you do not need to use your credit cards and rack up debt in times of crisis.

How Much to Save

Start with a short-term goal to save enough money to cover an unplanned expense like a plumbing repair or a family pets‘ trip to the veterinarian.  Your starter emergency fund may only be a few hundred dollars.  Gradually build your emergency fund so that you have enough money to cover three to six to months of household expenses.  This type of fund can save you and your family in case of a layoff, medical leave or pay cut, tiding you over until you can secure more work.

But Wait

Saving for an emergency should be a priority, but saving too aggressively can create an emergency.  Do not divert funds you use to pay down debt, particularly high-interest credit card debt, in order to establish an emergency fund.  In Dave Ramsey’s The Total Money Makeover, he advocates setting aside a bare minimum for emergencies while eliminating debt.  Once you have paid down debt, continue making your payments, but make them to yourself rather than to the credit card companies.

Finding the Money

Just because something is good for you does not mean you are going to do it.  This maxim holds true with building an emergency fund, because many people think they have to spend every penny they make.  Get creative to find the extra money for your emergency fund:

• Keep the change.  When you get change from dining out or shopping, place all coins and even small bills in an envelope.  At the end of the month, deposit the change in your emergency fund savings account.
• Pay yourself first.  Schedule an automatic deduction from your paycheck to an account with your emergency fund.
• Pay a luxury tax.  When you go to the movies, the bar or a restaurant, pay yourself a luxury tax.  Tip yourself 10 percent of the tab to go toward your emergency fund.
• Transfer your bonus.  When you get an unexpected lump sum of money in the form of a gift, bonus or raise, dedicate a percentage toward your emergency fund.
• Budget for it.  If you live by the line item, create one for your emergency fund.  Stay accountable to your fund by tracking its growth on a spreadsheet.

Using the Money

When is an emergency truly an emergency?  Spending for holidays and vacations does not qualify.  Buying a new computer may qualify, if your livelihood depends on it.  Repairing a leaky roof makes the grade, but painting your bathroom this season’s trendy shade does not.  Only you and your family can truly decide when and if to use an emergency fund.  If you find yourself dipping into the fund for non-emergencies, it’s time to create a separate short-term savings fund for projects, hobbies and other treats.

Overall, I believe that creating an emergency savings fund is important – and definitely not overrated. What do you think? How do you save money for an emergency fund - or do you just take it as it comes? Share your tips below!