The Importance of an Emergency Fund

When I was growing up, my parents always told me I needed to save for a rainy day. They were attempting to teach me the importance of putting away a little money on a regular basis in case an emergency happened. Emergencies are always going to happen. I suspect most people are like me and find it difficult to save money. When you are young, you typically have a lot of things to buy but maybe aren’t making much money. Those with families quickly learn that money usually goes out quicker than it comes in.

So what’s the solution to this dilemma? Experts recommend that you pay yourself first. As soon as you get your pay check put a portion of it in savings before you pay any other bills. You will always have bills to pay. If you wait until you have the extra cash, that day may never come. Setting up a direct deposit is even better. Most people do not miss what they don’t see. 10% of your income is the recommended amount. But if you can’t do that much, start with a smaller figure and increase this as your income goes up.

One mistake that many people make is they continue to increase their standard of living each time their income goes up. They seem to be more concerned with keeping up with their neighbors than putting away money for emergencies. Fourteen years as a mortgage underwriter has given me the opportunity to look at thousands of credit reports. Too many people live beyond their means, and when something bad happens they often lose everything. As your income goes up, it would be better to keep you standard of living the same. Save rather than spend the additional money. Warren Buffet, one of the wealthiest people in the world, lives in the same house he bought over 30 years ago, valued at less than $200,000.

When you have an emergency that requires money you do not have, it causes all kinds of havoc for you and your family. Borrowing money leads to even more payments. Sometimes you can’t qualify so you go somewhere like Car Title Loans or Payday Loans where the interest rates can be incredibly high, depending upon state law. Money is one of the major things couples fight about and one of the major causes of divorce. There are all kinds of psychological repercussions. You have an obligation to support your family but when you are unable to do that, it often makes you feel like a failure.

In today’s world, job loss is a threat for many people. Sometimes you don’t think about that as you climb the job ladder with pay increases at every rung. Downsizing and corporate layoffs usually result in change. You don’t always get a severance package, you don’t always get called back to work when laid off, and sometimes you get to stay with the company at a reduced pay rate. Experts recommend that you have six months salary in the bank for emergencies. Unfortunately too many people live pay check to pay check.

I am a total believer in positive thinking. I believer we can create our own circumstances in life if we think hard enough about certain things. But I am also realistic. There are so many things we can not control, like the current gas prices. As you think about your financial future, you have to assume there will be times when you will need extra funds. It’s best not to count on your family and friends for help. Lending money splits the best of friends and turns family members against each other. The best way to have an emergency fund is to systematically set aside a portion of your check each pay period.

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Filed Under Budgeting, Frugal Living, Money 

Comments

2 Responses to “The Importance of an Emergency Fund”

  1. Moneymonk on April 4th, 2008 1:06 pm

    “One mistake that many people make is they continue to increase their standard of living each time their income goes up”

    I think 70% of Americans do that, Hence, why many live paycheck to paycheck.

    The difference between savers and spenders is discipline.

    Good post.

  2. admin on April 4th, 2008 3:07 pm

    @ Moneymonk, Thanks….. you are absolutely right about an increase in spending with an increase in income.

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