Building An Emergency Fund To Make Living Less Stressful

Emergeny Fund image by http://www.flickr.com/photos/76657755@N04/

Creating an emergency fund is one of the strategies that has overall eliminated the greatest amount of stress from my life, and I absolutely recommend that every single person creates a similar fund.  

One of the theories put forth as to why Western philosophy began in Ancient Greece is because this was the first time a population of people found themselves with free times and were able to do more than simply worry about how to survive. If you’re too worried about where your next meal is coming from, there’s no way you’re going to have the luxury of sitting back and pondering exactly what the good life is. An emergency fund is a modern equivalent of free time that affords us just such a luxury.

Although I had done a pretty good job with managing money and staying debt free throughout most of my life, my marriage and subsequent divorce left me with a large amount of credit card debt and a large house note. I was also recently switching gears career-wise and therefore not making very much money.

Despite all of these difficulties, the very first thing I did when getting back on track was to create an emergency fund.

Estimates vary a bit on exactly how much money should be in this fund, but anywhere between 1 to 3 months of your salary will do good – and having anything at all is a huge relief. Currently, mine is at about 1.5 months worth of my salary, and I’ve found that this has served me very well based on my needs. The only reason I can think of that I would want to build it up even further is a larger cushion in case I were to unexpectedly lose employment. And this is something I do plan to increase once I’m fully out of debt.

This fund should be the very first thing you do when getting back on track financially. Once you’re meeting your minimum payments, work on this fund before you begin paying down any other debts. It will give your room to breathe later.

Over the past three years, I’ve had to dip into this fund on several occasions, most notably last spring and last summer. But I made sure to build the fund back up as quickly as possible!

Let me give you some examples to see where this fund can come in use.

Last summer the air-conditioners at both my main residence and rental house went out within two weeks of each other. That same month, my vehicle started over heating and was in need of some major repairs. I was able to take care of both air conditioners, and ended up selling my vehicle and buying another used car that I liked a lot better and got better gas mileage than the truck I had.

I live in the deep south, where people have died because they don’t have air conditioning, and I also commute to my job – so clearly these were all issues that had to be resolved immediately. Without my emergency fund, there would have been no way that I could have taken care of this.

Stranded in the desert…

The other time I dipped into this fund was when I was taking a motorcycle trip on Route 66 across the country. In the middle of the desert in a state park in Arizona, I had a major blowout on the back tire of my bike. It was completely destroyed, meaning I couldn’t move the bike at all. Unfortunately, you’re not really able to carry a spare with you on a bike. With the combined help of American Express travel services and my extremely caring and kind girlfriend, I was finally able to find a towing company that would both come out to my location and could tow a motorcycle.

I paid $300 to get towed to the nearest city, which was about an hour away. From there, I had to rent a U-Haul to load my bike into, and I drove about 5 hours through the night to Phoenix, which had the nearest store that could supply me with the tire I need.  The U-Haul was about $200 with all the mileage, and replacing both tires on my bike was just under $1,000.

None of these were expenses that I was excited to make – but knowing I had the money to get things working and get me back on the road left me with a sense of calm that otherwise wouldn’t have present.

Why Does This Matter?

The security of having this fund offers a peace of mind that simply cannot be equaled. If something goes wrong, you have room to breathe and to figure out a solution. The pressure and the stress and the urgency all remains much lower, and sometimes even non-existent.

Let me be clear – this certainly isn’t just for someone who is rich, and it’s not about any certain dollar amount. How much money does it take you to get by each month? That’s how you determine how much money goes into this fund. It’s for every one at every level of financial well-being.

I’m a firm believer that having more money does not buy happiness. However, having that cushion to get you by, whether it’s $500, $5,000, or $5 million dollars, will bring you more peace of mind than any object or experience you could possibly buy.

Once you have that done, your stress will go down and you’ll find you can actually focus some of your attention on other aspects of the good life!

If you haven’t done so yet, start your emergency fund now and let us know how it goes!