If you do any kind of reading in the personal finance space, surely you’ve come across the idea of an emergency fund. But just in case you haven’t, here’s a real quick and dirty rundown of what it is and why it’s so important.
The idea behind an emergency fund is that you want to have cash stashed away in case of an — you guessed it — emergency. This can be a job loss, medical emergency, car failure, your roof collapses, etc. Basically, there are things that we can budget for on a monthly basis — groceries, cable bill, cell phone bill, etc. — and we know roughly how much that will cost us each month, and we know where the money is going to come from to pay it off.
Emergency expenses are a different animal, because they’re entirely unexpected, you don’t know when they’re going to happen, and you have no idea how much they will cost you. As you can see, it can be tricky — and a little scary — thinking about how to best approach this.
But the solution to the problem is still quite simple — you just need to stash away a chunk of money each month, and DON’T TOUCH IT unless you absolutely need it? How much should you save each month? Well, you’ll hear different amounts from different folks, but really you should save as much as you can with any money you have left over every month.
When I get paid, a certain percentage (12%) goes to my 401k, and then I have an automatic transfer set up in my checking account where 10% of my leftover paycheck goes into an ING emergency fund. And again, the most important part is that you don’t take money out of it unless it’s an actual emergency. And no, a new cell phone, or flat screen TV, or trip to Bermuda does not count.
I like this “set it and forget it” method because it really does take the thought out of it once you have it set up.