An #Emergency fund is an essential tool for any successful financial plan. Having one in place can ensure that you will not go further into debt if an unforeseen event occurs. It can essentially prepare you for a 'rainy day.' Funding your current lifestyle for months in advance can seem like a daunting task for anyone, especially if you are trying to dig yourself out of debt. The good news is that it is possible to start and build a healthy and robust emergency fund by staying committed and getting started now. Any procrastination with setting up an emergency fund can place your financial stability in an at risk state.

What is an emergency fund?

As you begin your journey to create an emergency fund it is important to understand exactly what it is and why it is needed.

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According to Investopedia, an emergency fund is an account used to set aside funds needed in the event of a personal financial dilemma, such as the loss of a job, a debilitating illness or a major expense.

The money allocated towards an emergency fund should not be touched at all unless a true emergency occurs. The money sits in an account earning interest until it is actually needed.

For many people, the thought of saving money that cannot be touched seems like torture as it won't be used to cover day-to-day living expenses. However, contrary to this belief, having a loaded emergency fund offers a financial safety net or peace of mind in the event that anything unplanned occurs. There will be no need to freak out and panic if there is a gas leak or the plumbing needs to be fixed because having the emergency fund in place will not risk getting into more debt by using credit cards, or asking family members and friends to be a financial resource.

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Instead you can breathe easy and pay for the emergency yourself.

Another hard task regarding the emergency fund is resisting the urge to spend the money saved up on a vacation, new gadget or wardrobe, after all you worked hard for the money you deserve it right? Wrong! You deserve to be able to help yourself not get further into debt in the event that something unfortunate occurs. Having an emergency fund will require that you have some discipline to resist the urges to haphazardly spend money.

Pro Tip (A): If dipping into your emergency fund is a strong temptation for you, consider parking your money into a certificate of deposit, commonly called a CD. A CD is a saving tool similar to a savings account, however, unlike a savings account it earns a higher interest rate and there is usually a penalty charged for money that is withdrawn before the term. Maturity terms for CDs usually range from three months to five years. In general, the longer the term the higher the interest rate. The penalty charge should serve as a reminder to only retrieve the money for a real emergency.

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For an emergency fund consider using a CD ladder (a collection of multiple CDs that have different maturity dates). As an illustration, if you have $5,000 set aside for emergency purposes: Using a CD ladder you can purchase $1,000 3-month CD that returns 3.75%, $1,000 6-month CD that returns 4.00% and the outstanding $3,000 into a 12-month CD that yields 4.5 percent. If you do not need the money at the end of the term, you can rollover the amount into another CD making even more money. Essentially using this method you can build your emergency savings in less time with a higher return rate. Look for CDs with interest rates that compound daily for fast growth. The key to being successful with this method is to find the right mix of both flexible short term CDs as well as long term CDs with higher interests.

Pro Tip (B): To resist the need to splurge using money in your emergency funds start an ‘I deserve it’ fund too. Save up an amount that makes sense for your budget for the non-mandatory items and things that your heart desires.

Pro Tip (C): Set up an automatic payment to have the money go straight from your paycheck to the emergency fund and do not even look at the balance until there is actually an emergency. This can greatly reduce the desire to spend the money elsewhere.

Getting started with an emergency fund

According to financial expert, Suze Orman, an individual should have eight to twelve months of living expenses stored up in their emergency fund. For many, the thought of saving up to a year's worth of living expenses can be very discouraging, especially if they are paying off other debts. If a large cash reserve is not available to begin funding an emergency account, set the beginning target low in order to stay the course and ultimately achieve the emergency fund savings goal.

Begin by setting aside a reasonable amount for your budget, try starting off with saving $25 per week from each paycheck (the cost of 4 frappuccinos or 2 lunches) in 2 months a savings of $200 will have been achieved. For a more permitting budget try saving $45 per week and in 3 months the emergency fund will have a balance of $540. Having either of these amounts tucked away for an emergency can come in handy if one arises. Review your budget and come up with an amount that works best for you. Even if it is only $5 or $10 to begin with, this amount is better than saving nothing. The most important part is getting started.

Finding cash to fund your emergency account

If you are just getting started with turning your financial situation around, squeezing out $5 to $45 or more a week for an emergency fund may seem unrealistic. There are several ways to come up with extra money each month if you know where to look. Here a few ideas to get started:

  • Eliminate unnecessary bills - get rid of cable, the landline, fire your dog walker or cut out the expensive gym membership.
  • Carpool, ride a bike or take public transportation
  • Dine out less, prepare meals at home instead
  • Shop around for cheaper car and homeowners insurance
  • Request lower interest rates for credit cards
  • Refinance your mortgage
  • Go grocery shopping with a list and stick to it, do not purchase extra items
  • Purchase generic and store brands for items that are purchased frequently
  • Buy personal care items in bulk to save money on the unit price
  • Use your income tax refund or money gifted to you on your birthday or other hoildays
  • Ask your employer for a raise
  • Pick up a side hustle
  • Sell items you no longer have any use for, have a garage sale or use an app like 5mile, OfferUp or LetGo
  • Select a bank with no ATM fees, higher interest rates on savings accounts and no overdraft fees
  • Get rid of unread magazine subscriptions
  • Use coupons and promo codes
  • Make your own coffee at home
  • Pack your lunch everyday
  • Get a roommate to keep living expenses low
  • Use a service like AirBnB to rent out extra rooms in your home
  • Say ‘no’ to a cell phone contract, opt for an installment or pay-as-you-go plan instead
  • Sacrifice bad habits such as smoking cigarettes or playing the lottery*

*According to WalletHub, the average U.S. smoker spends $1,600 to over $3,800 each year on cigarettes. As reported by the Atlantic, the average lottery player in the U.S. spends $230 to upwards of $800 each year on lottery tickets.

Alternative emergency fund strategies

Sometimes the traditional methods for finding additional money do not work for everyone here are some additional creative strategies to consider:

Creative strategy 1: Bankrate's 52 Week Money Challenge presents a unique way to save over $1,000. To start, deposit a dollar amount equivalent to the week of the year. For example, during week one deposit $1, for week two deposit $2, week three deposit is $3 and so on. Commit to following the method religiously and you will have set aside $1,378 by the end of the year. Pro Tip: If you can afford to, set up two emergency funds using this method in order to achieve saving two times as much.

Creative strategy 2: Leave your wallet at home or at the office (never in your car) to prevent the temptation to make unnecessary purchases for items such as a latte or something for sale at your favorite store that you could go without.

Creative strategy 3: For unnecessary purchases use the 30 day rule, write the item down and wait for 30 days to pass, if you still want the item get it.

Creative strategy 4: When you break a bill save the loose change in jar. This may not sound like much but the change can really add up fast. Deposit the change into your emergency fund at the end of each month.

Creative strategy 5: Do not allow websites that you make online purchases on to automatically save your credit card number. By having to key the card number each time, you are forced to think twice before buying.

Creative strategy 6: Purchase energy efficient light bulbs, while they may cost more upfront you’ll save more money in the long run. They use less energy so your bill will be lower and they last longer --saving money on frequently replacing bulbs.

Creative strategy 7: Every month review all of your bills to find hidden fees that you are not aware of. If you find some call the company to get a better understanding of why you are being charged the fee. Consider changing providers if they have too many hidden fees or fees that do not make any sense.

Creative strategy 8: Use a site like Turo to rent out your car while you are at work during the day or at home during the evening. Pro Tip: If you can go without transportation altogether, opt to take walk, bus or use public transportation while other people pay to use your vehicle.

Creative strategy 9: If you in over your head with debt consider moving in with a family member that would not mind hosting you for free. If you take this route it is vital that you take advantage of the situation by paying off debt and saving as much money as possible for your emergency fund as well as for retirement. Before moving in have a move out date in mind so that you can stay committed to reaching your financial goals.

Creative strategy 10: Unplug phantom power also known ‘energy vampires’. Energy vampires are electronic devices and appliances that use idle current or standby power, meaning they are plugged in but not being used. According to the Lawrence Berkeley National Laboratory (LBL), the average home contains approximately 40 products that constantly use power, accounting for as much as 10 percent of household energy usage. Unplugging these devices regularly can reduce your energy bill and carbon footprint too.

If by doing any of these methods equates to more than your goal, you can roll that money into the fund as well or consider allocating the extra funds to a retirement account.

Celebrate milestones along the way

When you successfully reach the smaller target that you set for your emergency fund, pat yourself on the back and feel good about accomplishing your first milestone. Do not stop there, raise the bar and keep going –set you next goal for $1,000 or $1,500 and so forth. Watch your emergency fund grow and feel proud that you have taking the beginning steps to becoming truly financially responsible and comfortable. If an emergency arises, by all means use your fund to finance it (not your credit card). And continue putting money into the account to replace whatever amount had to used.

Have fun with it and challenge yourself in different ways to save more when you can. You will sleep much better knowing that you have a cushion of money piling up for any emergencies that may arise along the way. #Personal Finance #money tips