The Emergency Fund: Five Steps to Creation

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I read an article called “Creating an Emergency Fund on TheStreet.com’s web site this morning.

The author Jeffrey Strain shares 5 steps to creating an emergency fund. I’ll list them below with some of my own thoughts.

1. Start now
Ladydoughgirl: For me it is tempting to just focus on paying off our debt rather than build an emergency fund. However, we also realized we always have unexpected expenses and better to start an emergency fund than try to scramble and charge those unexpected expenses down the road.

2. Separate the account
Ladydoughgirl: We learned about ING’s high-yield savings account through other personal finance bloggers. We got the referral bonus (I think from Bostongal’s Open Wallet) so we started out with an extra $25 in our account. For me separating the account is crucial. I need to make accessing the money just a bit difficult otherwise I could see my temptation of dipping into it for pseudo emergencies.

3. Make it automatic
Ladydoughgirl: We opted to have an automatic payment sent to our ING account on the 15th and 30th of the month. This corresponds to my pay days. Since the transfer happens at pay day and automatically I don’t feel the pain. If you can’t afford $100 a month, try any amount. I think consistency is key. With $100 a month we’ll save $1200 by the end of the year.

4. Understand its purpose
Ladydoughgirl: This point is a bit sticky. My husband and I were just talking about this. Ideally we would like our emergency fund to be large enough to cover two areas (1) 3-6 months of salary in case I were to lose my job and (2) a hefty sum to cover any unexpected costs (such as car or house repairs) and large recurring items such as property taxes which we find ourselves scrambling to pay 2x a year. Right now our emergency fund will have to focus on #2 and cover those items. Once it gets large enough I’d like to have enough to also cover that 1st scenario.

5. Use it when you need it
Ladydoughgirl: Per #4 we will likely use our emergency fund this year when we have to pay our property taxes. In the meantime they money is sitting pretty in our high-yield ING savings account. This makes me feel much more secure and prepared.

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