Why Do I Need An Emergency Fund?

“Why do I need an emergency fund?”

Harry shook his head slowly and continued.

“I’m in debt and want to get out fast!”

So, I asked him, “And if your car dropped its muffler tomorrow, how would pay for that? “

Harry shrugged. “I dunno. I probably would have to use either my credit card or ask a relative to front me the money.

I nodded in understanding before saying, “Then you would end up further in debt than you are right now, right?”

He sighed replying, “Yeah, I would, but…”

Not Alone

Harry is not alone.

According to reports on CNBC, CBS, Fox Business, and CNN (all reports within the past year), fewer than 40 percent of Americans can cover a small emergency with cash.

That’s right, closer to 30-33% of people here in the US can cover a $1000 emergency.

They’re living paycheck to paycheck and in debt. That means many are in crisis mode and are one small event, or one paycheck away from crisis to catastrophe.

Avoiding Disaster

What’s the answer?

How do we avoid financial disaster?

The answer is simple…perhaps not easy, but it is simple.

Before you start attacking your debt full force, you need to have a starter emergency fund. That fund should be $1000.

But How?

First, you need to start by writing a budget. You can’t control your money if you don’t tell it where to go. Then, see if there are any areas you might be able to cut back on. Use those cut backs to begin saving for your starter emergency fund. But really, I want you to get your starter fund up to its limit quickly so, here are a few ways to do that:

  1. Work overtime
  2. Pick up a side hustle
  3. Have a garage sale/tag sale
  4. Baby sit

Really there are many ways to get to that $1000 mark.

And then, when you get there and something happens, it becomes a slight inconvenience, and not a crisis that wrecks your budget.

I’ve had a couple situations in which my emergency fund has saved the day: Flat tires, a broken mower… and I paid cash. Then, in my next month’s budget, I wrote in replacing the money I used! It works!!

What’s An Emergency?

This is where discipline comes in.

Not every urgent thing that happens is an emergency. Unexpected company showing up at dinner time is not an emergency…there’s no such thing as an emergency pizza.

There are three questions to ask yourself to make sure that you are properly using your emergency fund.:

  1. Is the event a surprise?
  2. Is the expense necessary?
  3. Is there an urgent need for this expense?

Using the family stopping by unannounced at dinner time – Yes, it was a surprise, and probably even a little rude.

But is it necessary to feed them? No!

I know that we don’t want to be rude and feel like we should offer them something, but if your budget is tight, it can’t handle the expense, and should something really important happen, do you really want to regret buying the pizza?

Finally, while we feel the pressure to provide something, the disappointment over not getting the pizza pales in contrast to the frustration you will have when you’re $30 short when trying to replace the tires that went flat.

You might say, but aren’t tires an expected expense? – Yes, yes they are, but at the outset you will not be able to save both for small emergencies and to throw money into sinking funds. That will come in time.

For now, though, let’s get going on your starter emergency fund!

Please feel free to leave me a note below or reach out if you have questions. I’m here to bring you HOPE!

 

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