Building an Emergency Fund

22 Mar

  photo source

Without a budget people have the idea that they’re doing better than they actually are, unfortunately many people are in worse financial shape than even they realize especially because people often don’t have enough liquid assets (aka cash reserves or savings.)  Its no surprise why its confusing all the “experts” use different percentages and ratios look at how they stack up:

Gail Vaz- Oxlade : “10% monthly income goes to savings” – often seen on Till Debt Do Us Part

Dave Ramsey:  ” 3 – 6 month emergency savings, invest 15% of income into Roth IRAs & Pre-Tax retirement”

Suze Orman: “8 month emergency fund”

And many more people use different ratios, first off lets start with, everyone needs an emergency fund we can all agree with that. In this economy, with little job growth, a soft real estate market and  such uncertainty you need more of an emergency fund not less. All emergency funds need to be able to cover all your monthly bills for X period of time (I personally agree with Suze Orman and 8 months is much more realistic in this economy)

An emergency fund needs to be funded: gather all your monthly bills (categorize these bills by priority 1 & 2 I will teach you below my system for this) and make sure once you’ve figured out the amount of bills you have monthly then multiply them e.g. total monthly income $4,000. and total bills $3,500 this means you need $3,500 X 8 months = $28,000 (emergency fund – I suggest you get a free savings account at your present bank or use an online higher interest savings account from HSBC or ING and immediately set-up  automatic with drawls every month to force savings)

Priority 1 Bills: (Bills that MUST be paid & could hurt you if gone unpaid)

Your Mortgage, Taxes, Insurance (for a home)

Student Loans (these are RARELY ever discharged in Bankruptcy so you need to keep paying them)

Bills that keep you and your family living: Food, Water, Electric / Gas (these are all essentials)

Priority 2 Bills: (These are bills you have that are NOT MUSTS however when working your family is able to afford these bills) aka know as the wants not needs of bills / debts. – These are cable TV, high speed internet, lawn cutting service, house cleaning services, car detailing, these are expenses that your family can afford during normal working conditions but are items that can & should be cut during times of unemployment.

 

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