3 Easy Steps of Building an Emergency Fund

When you're trying to keep control of your personal finances you want to view your credit score, examine your credit reports, and create a budged. Another of the key tools you should have in place is an emergency fund. Many people are trying to avoid using credit when it comes to paying for emergencies. Adding to your credit can actually put you in less financial control. You end up paying more in interest and then having to budget more money to repay the debt. However, having an emergency fund set aside for true emergencies can help get you through a difficult period without having to resort to using credit. Take a look at these three simple steps for how to build an emergency fund.

Setting a Goal

The very first thing you need to do is establish a goal for how much money your emergency savings fund should have. This goal needs to be realistic and useful. If you set a goal that will take you three years to achieve, you're going to become very frustrated. You may never reach the goal. If you set the goal too low, you may find that it isn't enough of a fund to deal with most of the emergencies you might encounter.

You may want to spend some time contemplating what emergencies you might encounter so that you can set a reasonable goal. Having to replace the tires on a vehicle, install a new hot water heater, or travel out of state for a funeral might be realistic examples of emergencies you might encounter. Do some calculations and come up with a realistic amount that will cover the most typical emergencies. No matter what you do, there are some emergencies for which you may not be prepared, such has having to do major home repairs or replace a vehicle. These should be taken into consideration when building an emergency fund.

Make Your Emergency Fund Available

This may be more problematic than you think. Your money needs to be available so that you can access it in an emergency, but it also needs to not be so convenient that you just dip into it once in a while because you've had a minor budget shortfall. Running out of money for groceries or some other budgeted expense is not an emergency -- it's a lack of planning. If you find yourself consistently running out of certain budgeted categories, you may need to revamp your budget. Whatever you do, don't fall into the trap of claiming that every little shortage is an emergency.

Leaving your emergency fund in a jar up in the cupboard is probably not the best choice. A better plan may be to keep it in a separate bank account which is accessible with an ATM or Visa card. What you don’t want to do is put it in a savings account or other controlled location where you can only get to it during certain hours of the day or days of the week. Most emergencies seem to happen during non-banking hours.

Establish a Saving Plan

An emergency fund is not the final goal of your savings efforts. It serves as a stop-gap measure to help deal with medium size emergencies so that you can avoid going into debt. It's a tool that will help achieve financial peace. It will not take care of those other problems which you know will one day appear.

Look at your budget and find places where you can trim some money. It may only be 4 or 5%  in one category and 3 or 4% in another. It is, however, how you will achieve a beginning to your saving plan. After you have reviewed your finances, you may find that your savings goals are out of reach. If gaining control over your finances is your ultimate goal, you may need to take some serious steps: getting a second job or working more hours, selling some replaceable assets so that you can pay down a bill, or downsizing a vehicle or where you live.

Whatever you do, don't give up. Budgeting and saving money can be a challenge, especially if you've never been successful at doing it before. Putting together a realistic plan is essential to achieve the financial control and stability for which you are looking.