While I certainly don’t agree with everything Dave Ramsey has to say about bankruptcy, he’s got the right idea with putting an emergency fund at the forefront of your financial priorities. His recommendation of $1,000 isn’t really enough to tackle large unexpected expenses like an air conditioning repair or car transmission repair, but it’s certainly better than having nothing at all.
1. Set a short-term goal
Setting a realistic short-term goal of $30 to $50 per week to put towards your emergency fund might not sound like much, but over the course of a year it adds up to over $2,000. Set aside this money in a savings account that can only be touched for those unexpected expenses like car repairs, house repairs, and out of the ordinary medical expenses. The whole point of the emergency fund is to prevent you from charging an emergency expense on a credit card that will charge you a 30% annual premium for the convenience of swiping a card. Racking up a few of these emergency expenses on a high interest credit card is often the catalyst for a bankruptcy filing, so even a $1000 to $2000 emergency fund can prevent this cycle from occurring.
2. Obviously, cut expenses
Everybody wants to make more money, but in the short-term, the easiest way to build an emergency fund is to cut expenses that are not absolutely necessary. Here are a few ideas to help build your emergency fund to a respectable level
1. Cut or negotiate your cable bill (I recently negotiated my cable and internet bill down to $69.99 from $130.00 just by threatening to cancel my television service).
2. Brown bag it to lunch. Surprisingly, people with money problems often NEVER pack their own lunch. This can easily save $80 to $200 per month, depending on whether McDonald’s or Longhorn’s is your lunch meal of choice.
3. Shop around for cheaper car insurance.
4. Cut entertainment expenses for a few months.
5. Cook more meals at home.
6. This may sound counter-intuitive, but stop contributing to your 401k or IRA for a few months to save for those unexpected expenses. Retirement savings is absolutely vital, but cutting back your contributions for a few months to build up a decent emergency fund isn’t going to have any long term consequences on your retirement and can help prevent financial ruin.
7. If you live close to work,ride a bike or walk.
8. Have $30 to $50 automatically deducted from your paycheck into your emergency fund. This is probably the psychologically easiest way to build up an emergency fund. Like retirement savings, if the money is taken out before you even see it, you won’t miss it. This is also why the Chapter 13 trustees in Georgia require debtors to have their plan payments deducted directly from their paychecks rather than mailing the checks in themselves.