Dear Action Line: The Moore tornado tragedy should make us realize the need for "rainy day funds." It's not just tornadoes that
make backup funds necessary, and everyone should save up for such a
day! But how? - M.G., Tulsa.
Many people who enroll in debt management plans could have avoided this by establishing any type of emergency fund, says the Bankrate.com website. So many people live paycheck to paycheck, a blown transmission bankrupts them. Don't let unexpected expenses ruin you. Start an emergency fund - today - using these tips.
Determine need: Build an emergency fund with a specific goal in mind. The amount depends on your income and expenses but a good target is, "Save enough to cover six months' of living expenses." We all have "wants" and "needs" and must distinguish between the two. Spend emergency funds only on "needs," never on "wants." In emergency times, don't spend on vacations, fancy new clothes, etc. Set and achieve small goals ($1,000 banked) - then go for two months' living expenses, etc.
Where to keep it: Your rainy day fund should be accessible, but not such that you'll be tapping it for everyday spending. Use an account separate from regular checking to build a psychological wall between spending habits and your emergency fund. Credit unions are best as they let you start accounts with smaller amounts of money. Online banks are also good locations as you can't just walk into one and make withdrawals. Keep emergency funds in multiple locations and accounts: online savings, savings bonds and home lockbox cash. Savings accounts pay less than 1 percent so consider a money market account allowing minimum-level withdrawals or buy short-term certificates of deposit with three- or six-month terms.
Treat as a bill: Set up an account that automatically transfers funds monthly from your direct-deposited wages into savings. "Pay yourself first" is the saving mantra but make it part of your regular budget - just as you would with the electric bill or house payment, to ensure the money is saved each month to help you build your fund. Ensure you've created a balanced budget so you know you'll have enough money left over to save.
Only emergencies: An emergency fund is for the unexpected: appliances that stop working, getting laid off, a long illness or accidental injury. Use the fund only for expenses you cannot foresee. In your budget, don't forget planning for one-time expenses each year: annual insurance premiums, car checkups, etc. Don't get access to it by debit card and when issued a checkbook for it, hide that.
Go slow: Rome wasn't built in a day and neither are emergency funds. Transfer $20 to savings every biweekly paycheck and save $520 per year. When you pay off that $50-a-month credit card add $600 a year to the fund. Quit smoking that $6 pack a day and add $180 per month - $2,160 per year - to your fund. Put your tax refund (average $2,800 in Oklahoma) in your emergency fund. Hold a yard sale and put $600 to $800 in your fund. Dump your pocket change in a jar and put $300 a year in your fund. Get saving!
Submit Action Line questions by calling 918-699-8888, emailing phil.mulkins@TulsaWorld.com or by mailing them to Tulsa World Action Line, PO Box 1770, Tulsa OK 74102-1770.
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