The activity of budgeting helps families determine how to reallocate the family income so that any and all fat can be redirected for a better and higher use all together.
Budgeting is setting aside money for anticipated and unanticipated future use. Although budgeting may be the process, an emergency fund should be the ultimate goal.
Every family on the planet should have an emergency fund. With resent natural disasters like Katrina, Tsunami and 911, there needs to be a pot of money available just in case the worse case scenario happens. Nobody ever plans to be in an emergency, which is why you have to consider that emergencies are inevitable. ER funds provide a cushion in the event of a host of unforeseen problems arising. Even though you can be in the peak of health and have never had a cold, you should have 6 months to a year worth of funds set aside. These funds may give you the added security you need in order to take the necessary time to recover from such things like your car dying, your home needing a new hot water tank or you losing your job.
Consider having two different types of emergency funds. One should be a petty cash fund that has about $1000 to $3000 in it to cover cash grabbing events like a busted water pipe or gas leak. The other one should replace your income for no less than 180 days in the event that you become displaced from your current employment.
If you do not currently have an emergency fund and don’t seem to be able to save for one then you may need to restructure your current bills. Do you really need digital cable? Do you need the fastest internet connection available? Think about what you can live with and what you cannot and make your changes based on what your long term needs are and not your short-term entertainment desires. The difference can mean a lot to your family in the event the worst happens or at least a cash-sucking event happens.
If you don’t plan for an emergency fund then you are on tender ground financially. So what if you have the big wonderful house or car. If you lose your job and have nothing set aside then you won’t have those things for very long. They are a necessity and not an option unless you plan to have no access to resources when you may be in dire need of them.
If you use your credit cards as your emergency fund back up plan, you will only incur debt that you could avoid. Besides, with interest rates as high as 25%, why would you want to pay one fourth more for resources set aside in an interest bearing account earning until the day you need it.
It only takes a little bit of money to get an ER fund going. Socking away little amounts like $25 to $50 each month will eventually enable you to rise to any occasional emergency. It takes discipline not to dip into the fund when it starts looking fat and tempting us.
Be diligent in putting away money for your Rainy Day ER fund. This is not an investment and the goal should not be to find the highest rate of return for this particular money. You need access to these funds at all times and should be able to get the entire out of whatever account it is in within less than 24 hours.
Common places for keeping your ER fund is in checking, savings, money market accounts. Certificate of deposit offer the best interest on your money but may not be available to you as quickly as you might think. So, if you are going to use a certificate of deposit, you may need to secure a small loan against it in order to have money quickly.
Since you should have two different types of funds how do you save for both of them? You might try splitting your savings dollars in half in order for each account to have an adequate amount of time to grow. Once you have reached at least $3000 in your petty cash account, you should start putting all of the savings into your long-term savings account. Once you have a year to 6 months of your income set aside, then you should begin your longer-term goals.
Abundance G has over 13 years of experience in the financial services industry. After years of education she came to the realization that much of what is being taught by the average financial advisor is useless. For a complimentary Financial Basics 101 e-Course, please visit www.financialbasics101.com.
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