Tuesday, November 8, 2011

How to Build an Emergency Reserve

What would you do if you suddenly lost your job? What would you do if you suddenly had a large car expense? How would you cope? Sad to say, but for most they would borrow, borrow, borrow and borrow! Maybe one too many borrows, but you get the point! The point is, most people are not properly prepared for a major financial setback.

What a lot of the the wealthy people do, is draw upon their Emergency Reserve. A much better solution as you won't have to depend on anyone else, including a bank, to help you out.

An Emergency Reserve is simply a sum of money that you set aside just in case of an emergency. This money should be kept in a place that you can access, however, not too easily. Preferably in a bank savings account at a different bank than you use for your everyday spending. And don't ever, ever ever have a bank card set up for this account. This account is for EMERGENCY USE ONLY!!!

If you make this fund too easy to access, you will be tempted to use it for non emergency items. These could include a vacation or a new whatever or what have you. But these items are certainly not emergencies are they?

The amount that you should have set aside in your Emergency Reserve is up to you and will depend on many factors. Factors such as your total net take home pay from work, your cost obligations that you have every month such as rent or mortgage payments and other household bills.etc. What you need to do is make a list of all your monthly obligations and tally them up.

Once you have an idea what your monthly expenses are, you must think of what possible emergencies you could face. If you operate a vehicle, you know that repair bills usually bite you when least expected. Your Emergency Reserve must allow for this. There are many other situations as well, but the single worst one is the loss of your main income source (your job) Be prepared, because it may happen and at any time even when least expected.

A general rule of thumb is to have an amount of between three and six months of your monthly expense obligations set aside as your emergency reserve. At first, this may seem like an awful lot to save, and it is. However, if you start saving now, whatever you have saved when the next emergency arises will be better than having nothing saved at all.

Once you have this fund up to a comfortable level, you will be able to start directing your savings towards your future wealth building goals as I will begin discussing in future posts. Just to clarify, the "pay yourself first" amounts from the previous posts is where the savings for your Emergency Fund will come from. There is no need to save more than that unless you have the extra funds of course.

Your Emergency Fund will become your safety valve so to speak to smooth out the bumps in your financial road ahead. Having this fund will allow you to concentrate your future efforts towards building your income and your wealth.

As always, I welcome your feedback and comments about this and/or other posts. If you have a specific question or concern or have a topic you would like me to cover, please let me know.

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