Crisis Fund

[jeffrey]

By Terry Rigg

What would it be like to have a pot of money available when you have an unexpected expense? I used to think that unexpected expenses was something that happened very rarely. But it seems like these days I have as many unexpected expenses as I do regular bills. One of the vehicles is always needing tires or repairs, the washing machine needs replaced or buying a new water heater (like I did just last week). That is where the Crisis Fund comes in.

If you have a budget in place, most of your regular paycheck is already allocated for something. Ideally about 10% should be put aside for savings. It would be a good idea to use about half of your savings for long term savings and half for your crisis fund. Your long term savings would be used for large purchases like a home or money for college for the kids while a crisis fund would be used smaller purchases.

Your long term savings can be invested in many ways to yield the best interest rate you can find since the money is intended to be tied up for years. Your crisis fund needs to be in a savings account or a checking account that earns interest to make the money available on short notice.

You may even want to use your crisis fund for bills or expenses that you know will be due in the future. A few examples of this could be school clothes for the kids, insurance payments that are due every three, six or twelve months or even a balloon payment on your mortgage.




One of the major reasons to have a crisis fund is to prevent the use of credit cards. All of the purchases you would make with a credit card could be made out of your crisis fund. With the average credit card interest being 18% or more, just having the cash available could save you hundreds of dollars a year.

If you don't think you have money for a savings of any kind you might want to think about ways of cutting back on something else to creat a crisis fund. If money is extremely tight, you will probably have to put off starting a long term savings.

Even putting $5 or $10 a payday away will help when you need it.

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Terry Rigg is the author of Living Within Your Means - The Easy Way and editor of The FREE Budget Stretcher Newsletter and Budget Stretcher web site. He has 25 years of experience counseling individuals and families concerning their personal finances.

[Roger]

I concur, that a Crisis Fund, or Emergency Fund, or Rainy Day Fund, or End-of-the-World Fund is important to everyone and should be a priority in their spending plan. Without such a pot of money, the credit card becomes the only way to replace a broken window or pay for a flu shot.

[ThiNg]

I like the article, but one suggestion I found helped. If you tap into your 'crisis' fund on a regular basis then you're probably not budgeting properly. Stuff like car repairs should be planned for in a separate account. I started to correct my life about 11 months ago, I don't make alot of money and I'm the sole earner for a family of four. But, I am now a pretty frugal guy. I've managed to get the crisis fund up to $5000.00 and need to save more to complete it. I was advised that it should be 3 x my monthly income (gross). To be used for job loss, medical emergencies (requiring time off), deaths in the family, etc. I budget for all of those other emergencies (like car stuff, house repairs, etc.) you'll find that they no longer seem like a crisis when you are all ready for them...

[marglo]

We have a savings which is almost 10% of our income that we use for non-monthly expenses of all kinds....everything from car repairs, membership dues to travel, however, the more important expenses must come first so there is little for travel and other things for which we would like to save. I look forward to the day when my debt will paid off so I can use it for saving for these type things.