Emergency Fund

Creating an emergency fund is one of the easier concepts to understand but one of the more difficult to implement. Why is this? Pretty simple, Americans would rather consume (spend) rather than save. Last year an alarming statistics was published that Americans have a negative savings rate (spending more than save).

Our economy is dependent on everyone being a consumer. The latest numbers show that consumption makes up over 70% of the gross national products of the US! I just heard on NPR this morning that an economist that they were interviewing said we are in the midst of a "Consumption" recession. Consumers can no longer prop up the economy with over 15 trillion dollars in lost wealth so far through decline in investment values, retirement account balances, housing equity and actually beginning to save (5%). But if all these things happen at once as it is now our economy has to suffer greatly, which it is.

This brings me to the subject at hand about an emergency fund. If every working adult had 3 -6 months of ongoing expenses in a liquid account do you think we would be in the pickle we are in now? I don't think so because we would be more of a saving nation not a consumption nation.

What is an emergency fund used for?

• emergencies, unexpected, non-budget expenses such as medical bills and home repairs.
• pay regular expenses (food and lodging) if one becomes unemployed, disabled or loses income for other reasons. With 8.1% of the population in the unemployed ranks, and growing, understand this quite well.

If one does not have an emergency fund to tap when something unexpected happens what to they do? What would their safety net be against life events that happen?

• credit cards
• take a tax penalty, if under age 59 1/2, by withdrawing from retirement accounts
• declare bankruptcy; a common example now is losing house to foreclosure

What can be done to begin building the emergency fund?

• Get one's house in order. Make sure one understands where income is being spent. Use such tracking software as quicken or free Internet based site, mint.com.
• Pay yourself first
• Downsize
• If a couple, one spouse works more.
• Home equity was a possibility but now either there is no equity in home or credit is tight resulting in no lending.

With an emergency fund of at least 3 to 6 months of living expenses will protect against;

• The unexpected that will happen
• Manage stress because of the peace of mind it will bring
• Reduce risk; combining emergency fund with health, disability and life insurance

You might have avoided the unexpected so far in your life or have scrapped by but take control by funding an emergency fund!