One of the first things to get yourself on the path to financial freedom is to start an emergency fund. Before you start to pay down debt you should get some kind of cushion in place for the inevitable.
Typically it’s a good idea to build an emergency fund of up to $1,000 before attacking debt. This is enough of a buffer to account for most emergencies. Once you’ve got the debt off then get your emergency fund to at least 6 months of expenses before socking money into savings and investments.
The tough thing is that when we finally have an adequate emergency or rainy day fund built up then it seems like there’s always something waiting to take it away. It may seem this way but what really constitutes an emergency?
Be sure to set your emergency fund aside in a separate checking or savings account and try your best to stay out of it. Don’t make it easily accessible and remind yourself frequently of the purpose of the account. It’s there to give you peace of mind as you attack your debt and stay out of debt.
What makes something an emergency?
Anything that threatens your well-being or survival should be considered an emergency and valid reason for dipping into your emergency fund. This might be something like your heating system going out in the dead of winter or needing a repair on your vehicle so that you can get to work.
Some things that are NOT an emergency include.
- Upgrading your TV package for NFL season.
- Getting the latest iPhone.
- A birthday or holiday.
- New clothing for a special occasion.
- A new car for any reason other than your old one being totaled.
I hope that you get the picture. Think long and hard before you touch what you’ve put away for a rainy day. Get creative if you have to.
I’ve heard stories of people actually putting their emergency fund in a picture frame and putting something like ‘Break only in case of emergency.’ on the front of it. Get creative if you have to!