Emergency Savings the “Centsible” Way

What if you lose your job and cannot find employment for several months?

What if you have to pay unforeseen medical expenses? What if you are injured and cannot return to work for a long time? Or the washing machine and the car break down at the same time? Or a family member is hospitalized, and although you have medical insurance, the deductible amounts and the copayments are costly?

Do you have enough money set aside to help cover such financial emergencies? If not, it’s important to establish an emergency savings account—a reserve fund that will lessen the shock of financial hardship.

Counting the cost. Your first goal in setting up an ideal emergency fund should be to have at least enough money to cover your expenses for three months. After that, you can expand your goal to six, nine, or even twelve months. Financial experts say that in times of financial crisis, families can usually cut expenses in half and still get by. This means that unless your monthly expenses during a crisis were unusually high, you probably would need only one and one-half times your monthly income to cover your expenses for a three-month period. If you intend to draw from your year’s supply of food, clothing, and other items, you can adjust your goal accordingly.

Some people prefer to build up emergency funds gradually. If you plan to do so, it may suit you to save some money during each cycle of your pay period. For example, if you get paid weekly, set aside money weekly; if you get paid monthly, add to your fund monthly. Experts recommend that families save 10 percent of their income. In the case of my family, we could save only 2.5 percent of our income at first, but we worked at it until we finally reached our goal. In the process we became better savers. Whatever amount you decide to save, the important thing is to put money into a savings account on a regular basis.

Availability of funds. Although your emergency money should be accessible in time of need, it should not be so easy to get at that you’re tempted to use it for day-to-day expenses. You can keep your money safe from unwise withdrawals by exercising self-discipline and by observing these guidelines: (1) keep your emergency savings account separate from your other accounts; (2) decline automatic teller cards and checks for this account so that you must go to the bank to get your money; and (3) decide beforehand under what circumstances you will use your emergency money.

It is also wise to get an interest-bearing account. Your primary goal is to have your money available upon need, but an account that earns interest at the same time is an added bonus.

Getting started. This is often the hardest part. The key is commitment. You must make payments to your emergency savings account as if it were any other bill. Whether you take advantage of an automatic payroll deduction plan or make deposits into an account, it is important that you commit to building your savings program and accept the responsibility of preparing for your future financial security.

Be patient and persistent as you contribute to your emergency savings account. Remember that it is by small, regular deposits that you will achieve your financial goals. For most people, it takes one to three years to save enough money so that the account will be an effective buffer against financial crises.—Vaughn Cox, Sandy, Utah

Photography by Phil Shurtleff; props by Jeanette Andrews