Situational Budget - Emergencies
Budgeting Money For An Emergency Fund - Page 2

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Budgeting money for true emergencies...
(This page is a continuation of Budgeting Money For An Emergency Fund - Page 1.)

Read on for tips about budgeting for emergencies.

Budgeting Money For True Emergencies

1. Your emergency fund is NOT an investment.

You will use it to care for yourself during a stressful time. Don't put your emergency fund at risk by investing it somewhere hard to get or easy to lose, like the stock market.

Put it into a savings account or special checking account. I recommend using ING Direct's FREE "Electric Orange" High Interest Checking:

Your emergency fund is protected from loss because ING Direct is FDIC-insured.
Your emergency fund is quickly accessible because you get free access at over 35,000 ATMs.
Your emergency fund is safe from you blowing it because it is in an account separate from your primary banking institution.

If you open a savings account at the same bank your primary checking account is at, that money is too easy to get. Emergency money needs to require a concerted effort to get to it. Budgeting money with ING Direct's Checking Account accomplishes all of this.

2. Start small.

Your first goal with your emergency fund is to get it to $1,000.

Start small, huh? Right... that's a lot of money.

No, really. I mean it.

How did you save $1,000?
Share your story with the rest of us!

$1,000 can be raised within a couple of months for most people after skipping eating out a few times, having a yard sale, adding a few extra hours at work, and selling the jet ski.

Also, often we get windfalls, which can be a bonus at work, someone pays us back, the IRS sends a refund, or we get an inheritance.

Just imagine what this $1K can do for you:

If you get in a car wreck, rather than having a medical emergency, a vehicle emergency and a financial crisis, you just have a medical and vehicle problem.
If your great aunt passes away, rather than having to grieve and figure out how to pay for new black clothes and a flight across the country and a stay in a hotel, you just have to grieve.
If you lose your job, rather than melting in fear, you can relax and get back on track quickly.

You get all of this stress reduction because of budgeting money for emergencies.

3. What about budgeting money for really big emergencies?

Dave Ramsey says to use this small $1,000 emergency fund until all of your debts are paid off.

Don't increase it over $1,000 while you are paying off debts. When you do use some of it, then fill it back up and get back to paying off your debt.

After your debts are gone (except for the mortgage), Dave Ramsey and every other financial guru will tell you to set aside 3 to 6 months of expenses as a fully funded emergency fund.

That's the final part of the emergency fund: Make it bigger.

What emergency did you survive because of your emergency fund savings?
Share your story with the rest of us!

Put enough money in there to cover you and your family for a long time if something really big and serious happens.

What exactly is "3 to 6 months" worth of expenses?

Look at your monthly household budget.
Total up all mandatory bills and the mortgage/rent.
Add in money for gas and groceries for 4-5 weeks.
Leave out other expenses you will stop spending money on during the crisis. (e.g. - subscriptions, extra debt payments, hosting parties, saving for a car, etc.)
Figure out the dollar amount you need to survive each month.
Add 10% of that number back in to your total because we always need more than we think.
Multiply your monthly total by 3 to tell you what three months' worth of expenses is. This is your next goal for your emergency fund. Save up 3 months of expenses.
Set your next goals for 4 months' worth, 5 months' worth, and 6 months' worth.