Emergency funds: One expense at a time - MoneySense

Emergency funds: One expense at a time

People often can’t wrap their heads around the idea of getting a pile of money together for an emergency. The concept of having six months’ worth of expenses covered is just too overwhelming. Here’s an idea that’ll make it easy peasy to get your emergency fund together.


Start by listing each category of expense you would have to keep covered if you hit an emergency. That may include rent or mortgage payments, food, medical costs, insurance, child-care, car payments, gas and the minimum payments on your debt so you don’t ruin your credit history. These are your essential expenses: the stuff you must pay to keep the wolves from the door.

Go back over your list and cut out anything you’ve kept that’s not essential to keeping body and soul together. If you’ve just gone from two incomes to one, you can give up your cable, telephone, entertainment and everything else you wouldn’t die without, at least in the short term. Your Emergency Fund is designed to cover the essentials of life.

Now write in the average monthly amount for each of your essential emergency expenses. Then put six check boxes beside the amount.

Pick the first expense you want to have covered. Most people pick either the roof over their heads or the food in their bellies. Let’s go with shelter for our example, and say you need $1,200 to cover your rent or mortgage payment.

How much can you save every month? Ten dollars? $25? $100. Whatever it is, open up a savings account where they’ll pay you a decent rate of interest and ask that the amount you’ve designated be deducted from your regular account to this account every month. For our example, we’ll say you can save $100 a month.

Now you’re going to save your first month’s worth of rent/mortgage expenses. So when you’ve got your first $1200 in your Emergency Fund Savings Account, you’re going to put a check-mark in one of your boxes. There. You’ve done it. One month’s worth of shelter money at the ready, just in case.

One of the decisions you’ll have to make is whether you’ll save all six months’ worth of shelter money before you start on your food category, or if you’ll check the first box for each category and then start back at the beginning. That’s your choice. My choice would be to put a check-mark in the first box of each category, and then move on to save my second month’s worth of essential expenses.

Now you have a plan to build your Emergency Fund. All that’s left is for you to stop planning and start doing.  Go ahead, pick up a pencil and a piece of paper and start making a list of your essential expenses. NOW!