Ask any financial expert and they’ll soon tell you that your family’s emergency fund should be large enough to pay your expenses for at least three to six month’s worth of living. That 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.

With you emergency cash fund in place you won’t have to worry about cash til payday programs or researching the best payday loans.

Having an emergency cash fund is prudent risk management.

Why Create an Emergency Cash Fund?

So what is this emergency cash fund for and why is it a good idea to have one? That is a good question and one that should be answered because it is your “why” or “incentive” for working towards having your six months of emergency cash funds available. Let’s face it we live in an uncertain world with uncertain times and economies.

Your emergency fund is easy to set up. All you need to do is know what your cash goal is and figure out how you’re going to attain it. You will soon see that saving three or six month’s worth of expense money is easy.

How to Create an Emergency Cash Fund

The first thing you’ll need to know is the amount you’ll need to save to create your emergency cash fund.

Step One
Add up all your currentl monthly expenses such as your mortgage payment [or rent if you don't have a mortgage], car payments, insurance, household expense, groceries, and so forth. Make sure you include everything including haircuts, clothes and foxtel. As a guide an average household, this would run to about $3,400.00 per month.

Step Two
Once you know what your target amount is, you simple multiply it by three or six to get your three and six month emergency cash fund totals. If yours is the average, three months is $10,200 and six months is $20,400. You may thing these are big numbers, but you’ll soon see how they can become workable.

Step Three
I suggest you approach saving for your emergency cash fund just like you would any other financial goal. Now you know your target monthly expense, you need to create an overall monthly budget. How much do you make in a month and what is the difference between that and your expenses? Most people consume about 65% of their incomes in just housing, food, and transportation which means you’ll have about 35% of your income to work with. Let’s call that discretionary income.

It is quite possible you don’t have 35%. Whatever your percentage is that’s your starting point. Don’t set yourself an unrealistic goal. Look at your options of saving over a 2, 3, and 5 year period. For example if your were aiming to achieve your three month’s emergency savings inside 3 years, working with our $3,400/month number from before, you’ll see that this can be achieved by saving $340.00 per month for two and a half years. That’s 10% of your income.

Accelerating the Process

Here are a couple of other ways you can consider to increase what you’re saving towards your emergency cash fund.

• changing some of your lifestyle habits. For instance, when it comes time to buy a new car, opt for one that’s less expensive to purchase or to operate (or both).
• Explore whether refinancing your home mortgage will save you money over time.
• Consider starting a home based business to increase your income and tax savings. Here are some useful tips on how to choose the best network marketing company
• If you have more than one credit card, explore whether a debit card is a good option for you.

I’m sure when you put your mind to it you’ll come up with many other ways you can increase your savings over time.

If you keep your goal in mind, set up the payments to the emergency fund in the same way you do for all your other bills, and work towards your goal diligently, you will save your six months emergency cash fund before you know it.

Simon Smith
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