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Quickly Building Up an Emergency Fund

You hear the talk everywhere you go in the world of personal finance: "You need an emergency fund!", or "Should you pay down debt first, or start saving?" Well, I am not getting into that debate very deeply. However, many people have been in a situation where having five to ten thousand dollars would have made a huge difference. And I would also suggest that you should work on paying down debt as well as building up an emergency fund simultaneously. I say this because the emergency fund is supposed to be there for an emergency... and if you could predict when that will occur, then it is likely not an emergency, is it? Anyhow, this discussion assumes that you have decided to build up an emergency fund. It is great to get a nice quick start, as well, because if you don't, you may become discouraged. So here are some things I have done to jump start my emergency fund that you may find useful:

Open a High-Yield Savings Account: In economics, the term "opportunity cost" is used to describe the most likely alternative that you would seek in any decision. For instance, instead of saving $100 a month for an emergency, you would may likely decide to spend it on a nice dinner. Well, when you are just saving money for an emergency, the opportunity cost will seem very high. So, in order to make it more powerful, you need to receive a return on your avoided opportunity. One of the more popular savings accounts is the HSBC Online Savings Account. Currently, it is offering a wonderful 5.05% APY. Besides this, there are no fees and your minimum deposit and balance are only $1.00. Just to make this better, there are typically sign-up bonuses available if you read through the FatWallet thread. These are usually around $25. (Currently, they are offering a $25 Best Buy Gift Card instead of cash).

Make it Automatic: Sure, you have read all the reviews of Automatic Millionaire (you may have even read the book for yourself). You need to take the decision out of your hands. In a previous post, I referenced a website that will let you amortize a savings goal. My goal for my savings account is $10K in ten years. So, given the amortization, I need to save about $32 every pay period at 5.05% to get to $10K in ten years. However, I knew that I would occassionally tap the fund, so I bumped it up to $45 per pay period and set up direct deposit. So, in ten years, without having to actively decide to save, I will have $10K!

Short-circuit the cycle: Now, ten years is a long time to wait for an emergency fund. So, we need to short-circuit this time frame. It is not bad to have the previous automatic savings, it just means that we need to do some extra work here and there. I do a few things to make some extra money, and I make sure that at least half of it goes into the emergency fund (if not, more). For instance, I have outlined making some extra cash with MaviShare. I took 100% of this money and deposited it into the savings account.

Also, I have been selling some items that have been collecting dust on eBay. I put about 65% of those funds into savings. Beyond that, I do a considerable amount of mystery shopping. I put half of that money into savings (which actually is more than half of the profits, considering that a good chunk is usually reimbursement money). And last, and probably least (cash-wise), I scrap metal here and there. Aluminum cans are an easy way to start... and it takes about 24 aluminum cans to equal one pound of aluminum. Further, many places deduct 3% for "moisture content". But, this is usually in the for of cash, so it doesn't go into savings, but it does make the saving easier to accept.

Reduce your burdens: Nothing can break good savings habits better than a heavy financial burden. Even if $50 will not fix the situation, you will feel very tempted to not save if you have financial pressure. You need to reduce your expenses. You can always turn to the Automatic Millionaire for this (the Latte Factor). In the mornings, it is easier, and more fillings, for me to have a breakfast sandwich and not a bowl of cereal. The McDonald's by my house makes it very convenient, as well. But, this is about $4 per day, or $80 per month. So, instead of doing that dance, I buy a big box of breakfast sandwiches and orange juice from Sam's Club every couple of weeks. It ends up costing me half as much. For lunch, it is difficult to spend as little as $5 in downtown Indianapolis (of all places). However, it is VERY inconvenient to bring my lunch. So, instead of bring my lunch, I bring my drink and only get a six-inch sub for lunch, rather than a meal. This brings my lunch cost down by about $3 a day, and it also keeps me from consuming the bad of chips with the meal. So, for those two meals, I save about $100 a month, and that is more than the direct deposit. There are plenty of other places to reduce expenses as well. We are saving $15 a month on our electric bill compared to the same time last year (even though this summer has been much warmer) by switching our most used bulbs to compact fluerescent bulbs.

I hope this is useful for you. It has worked out very well for me. I should have had over $1080 in my savings by the end of this year, but I ran into some savings issues and spent my money. However, I am back on track and have more than caught up with these few tricks. So, if I run into some issues in the future, I can always use the extra cash I make, rather than tapping into my savings. Further, please share aany tips you have for making quick increases to your savings!


Anonymous Anonymous Says:

February 25, 2008 10:39 PM 

Having an emergency fund is a must. Everyone needs a little insurance against a rainy day. Then once you have that set it leads to throwing your money at bigger and better investments. It's a snowball!


Anonymous Luke Says:

July 08, 2010 5:16 PM 

May be good for one who is rally interested to build a quick fund. On of the best way to build fund by using high yield savings accounts. But first of all, need a clear idea and right decision.

Anonymous richard Says:

October 11, 2010 6:28 PM 

The post is very interesting, which has inspired me, i would definitely share this information among others.

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