The Amazing Emergency Fund

In a recent post, I covered tithing, which I consider to be step 0 on the road to financial peace.  In the next, several posts, I plan to cover the remainder of the steps as follows.

• The Amazing Emergency Fund
• Annual and Monthly Budgeting
• The Debt Snowball
• Investing for College and Retirement. This will be a topic requiring several posts, including
• Basics of investing - What is Investing, Why Invest?, When Should You Begin Investing? 
• Investment Vehicles - What are CDs, Stocks, Bonds, Annuities, Cash Value Life Insurance, Mutual Funds, Index Funds?  How do they work?  When should I use them?
• Investment Strategies - Market Timing, Day Trading, Momentum Trading, Dollar Cost Averaging, Buy and Hold.  What are they?  How do they work?
• Retirement Plans - How much do I need?, 401K, Roth 401K, Traditional IRA, Roth IRA, 403B, etc.
• College Plans - Coverdale Education Savings Accounts, 529s, etc.
• Mortgages - Types of Mortgages, Mortgage Guidelines, Reverse Mortgages, When to begin paying off your mortgage early.
• Giving

Hopefully you are looking forward to some of these future posts.  Let's get started!

The Amazing Emergency Fund

The Emergency Fund is your backstop against the unknown things that life throws at you.  Sometimes literally.  Remember when that truck slung a rock up off the highway and cracked your windshield?  Yes, that's what I'm talking about.  The purpose of an emergency fund is to keep you from falling back into debt when a negative financial event happens in your life.

Whereas tithing is step 0, the Emergency Fund is step 1 in building a solid financial foundation in your household.  Start with $1000 ($500 if you make $15,000 per year or less).  Later, after you're out of debt except for the house, we will increase it to 3-6 months expenses.

That's a lot of money.  How can I save it?  Make it a priority!  Its amazing how resourceful we can be when we want to be.  Could you save $1,000 quickly if someone offered you an otherwise all-expenses paid dream trip for a month in Bora Bora?  Of course you could!  Have a yard sale.  Sell something on eBay.  Work some extra hours.  Cut off the cable.  In a nutshell, do whatever you have to do.  This is an important thing to do for your family.


Keep your emergency fund in a separate account.  Don't mix it in with any other money you have.  You want your emergency fund to be readily available if you have an emergency, but Hands Off! for any other purpose. 

What is an emergency?  Here's my definition:  "an emergency is something that happens that affects a necessity of life, i.e. food, shelter, transportation, that cannot be overcome without otherwise going into debt.  Examples of emergencies:  tire blowout, unexpected illness, job layoff, air conditioner/heater quits working.  Get my drift?  This list does not include vacations, eating out, Christmas presents, or clothing purchases.  That was purposeful. Those things are all wants, not needs.

The beginnings of true Financial Peace.  I think you will find, as my wife and I did, that once you have an emergency fund in place, you can rest easier at night.  That's a great start towards true financial peace.

Why can’t a credit card or equity line be my emergency fund?  The short answer is this.  The last thing you want to do when you face a crisis in life is go into (more) debt.  That puts you behind the 8-ball, vulnerable and ready for a sucker punch from the next emergency.  Its crazy how problems tend to come one after another in times of financial weakness.  If you go into debt because the transmission in your wife's car blew up, you can almost plan for a leaky roof.  Its weird that it happens that way, but it does.

Well, that's all for today.  I hope you will jump right in and get that emergency fund saved if you haven't already.  One very important thing to do is agree with your spouse that you will not touch your emergency fund unless there is a true emergency.  Hold each other accountable on this!

Next up in this series:  "So What's the Problem with Debt?".  See you soon!