Emergency expenses are a simple fact of life. It would be nice if all our expenses were predictable and fit cleanly within our all important budget, but we all know this is just not reality. Maintaining an emergency fund is one of the most important aspects of a personal finance plan. Ideally, this emergency fund should amount to 3-6 months salary, but for those of us who live paycheck to paycheck, this may seem like an impossibility. The key is to simply get started saving for one. Consider 3 important reasons why an emergency fund is so important:

1) It halts or slows down debt accumulation by allowing you to draw from the money you’ve saved rather than use a credit card to cover the emergency expense.

2) It helps stabilize your budget by eliminating the need to constantly change your budgeted amounts to cover the emergency expense.

3) It prevents late fees by allowing you to pay your bills on time or replenish your checking account to avoid an overdraft charge.

Knowing the reasons for having an emergency fund is just the first step. What strategies can we use to start the ball rolling and build up a comfortable buffer that will allow us to relax a little and enjoy life rather than worry about money all the time?

  1. Start small. The worst thing you can do is try to save more than you afford. As your savings grows, however slowly, you will begin to be encouraged and be motivated to save more when you can safely afford it.
  1. Automatic deduction. Apply the “pay yourself first” principal and have the amount you’ve decided upon automatically deducted from your paycheck each week into a savings account. This way you won’t be tempted to spend it and won’t miss the money you don’t see.
  1. Reduce frivolous expenses. This is nothing more than living more frugally. Cut back on movie rentals, gourmet coffee, vending machine snacks and other things that you can honestly live without. Add up these expenses and add the amount to your emergency fund.
  1. Round everything up. This is a clever little trick which allows you to pay yourself every time you enter an amount in your check register by rounding the amount up to the nearest dollar on every expense. When you balance your checkbook, transfer the “extra” amount over to your savings account.
  1. Continue paying debt to yourself. After paying off a credit card, car payment or any other debt, continue paying that amount to your emergency fund. You won’t miss the money because you’re already accustomed to paying it and will see your savings account increase very quickly!
  1. Limit access to the fund. If you are one who might be tempted to make a withdrawal every time you pass an ATM, make it harder to get to. I have an amount deducted from my paycheck to a savings account that I set up in a credit union across town. I cut up the debit card they issued me and set it up so that I could monitor the account online, but would have to visit the credit union to make a withdrawal. This has redefined “emergency” for me.
  1. Save pocket change. Empty your pockets into a jar every night and forget about it. When the jar starts overflowing, take it to the bank and give your savings a boost.
  1. Save on auto insurance. Get new quotes on auto insurance. This industry is highly competitive and you may be surprised at how much you can save. If you’ve recently paid off a vehicle, switching to solely liability coverage can save you a substantial amount.
  1. Fill spare time productively. Instead of watching 4 hours of television each evening, work a part-time job a couple of evenings a week. Have a garage sale on the weekend or sell your stuff on sites like e-bay or Craigslist. Of course, all proceeds go to the emergency fund.

This list is certainly not exhaustive. Be creative and come up with ideas of your own.

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