Creating and Maintaining Your Emergency Cash Fund

By Simon Smith

Ask any financial expert and they'll tell you that a families emergency fund should be large enough to pay their expenses for at least three to six months worth of living.  Thats means having enough money to pay your monthly budget for up to six months.

This may seem like a lot but try living when you are in a tight spot and have no savings at all. Having an emergency cash fund is prudent money management. 

Why Create an Emergency Cash Fund?

That is a good question and one that should be answered because it is "your why" or "incentive" for making sure you have your six months of emergency cash funds in place. I mean let's face it, we live in an turbulent ecomonic times and we never know whether we are going to lose our job tomorrow, or have some horrible health challenge strike us down.

It's been my experience that if "Murphy's Law" has anything at all to do with it then it will be at the most inconvenient time!!

Which is exactly why you need an emergency cash fund.

Your emergency cash fund can be as easy to create and maintain once you know your starting point. It can also become part of your retirement fund. You will soon see that saving for your 6 mths worth of expense money is insignificant compared to saving 20 years of retirement funds.

How to Create an Emergency Cash Fund

Step One

This is the easy part. Work out your existing monthly expenses. Make sure you include everything. mortgage payment or rent, car payments or leases, insurance, household expense, groceries, life insurance, foxtel and internet connection. In an average household, you would budget for expensesof $3,000.00 pm. 

Step Two

Once you know what your number is, you simple multiply it by three or six to get your three and six month emergency cash fund totals. If your expense budget is average then you would need to save $9,000 for a 3 mths and $18,000 for a 6 mths emergency cash fund.

Step Three

It's best to approach saving for your emergency cash fund like you would any of your financial goals. Think ahead and start right away. Most families use approximately 65% of their available income in paying for housing, food, and transport. That means the 35% that is left, is what can be used for saving for your emergency cash fund.

Obviously, that 35% is your starting point and in most cases not all of it can be used. Your plan should be looking to create your emergency cash fund as soon as possible. Do the numbers and see which one will work the best for you. The shorter the time the better. If your expenses were $3,000 pm as above and you saved 10% of your income you would need to save $300.00 pm over 2 1/2 years. If you set up your saving program payments so it is on auto pilot you will save your 6 mth emergency cash fund before you know it.

How to Accelerate the Process

Here are a couple of other ways you can free up dollars over time, to increase what you're putting into savings.

• Changing some of your lifestyle habits. For instance, when it comes time change your car, consider opting for one that's less expensive to purchase and/or more economical to run.
• Explore whether refinancing your home mortgage would save you money over time.
• Consider starting a home based business to increase your tax savings.
• If you have more than one credit card, explore whether a debit card is a good option for you.

I'm sure if you put your mind to it you will come up with many other ways you can increase your savings over time.