Budgeting for an Emergency Fund Savings Account

In today's debt filled climate a saving grace for any family facing a financial emergency is having a well funded emergency fund. Many people have gotten into financial trouble simply because they have never learned to save and have relied on high interest credit cards or personal loans as a substitute when a need for emergency money arises. Unfortunately saving money in today's rampant consumer driven society is not something the average American family does well.

The road to financial freedom starts with the ability to manage ones money and one of the first steps is to build a small emergency fund that will relieve the need to use credit cards or other types of credit when an unforeseen financial problem occurs. An emergency savings account allows you to pay cash in those situations instead of making payments and incurring the interest credit cards charge.

Staring an emergency fund can difficult for some people. Just finding extra money to put into this type of account can pose a problem for those who find their finances stretched to thin. The easiest way to start finding that extra cash is to start keeping a budget, or if that word sounds to restricting, a cash flow plan. Very simply a cash flow plan shows you where all your money is being spent. The amazing thing about doing this is the amount of money you can free up just by keeping track of what you actually do with it.

The next question many people ask is how much should their emergency fund be? In reality it depends on what your current financial situation is. If you currently have a lot of high interest debt then it doesn't make sense to have a large amount of money in a low interest saving account. If this is the case it is best to keep your emergency fund small, in the $1000 to $2000 range, until you have paid off all your outstanding debt, except for your house mortgage. The idea is to throw as much money at your credit card, car loan, student loan, or any other debt as possible. Once that debt is wiped out you can start saving large chunks of money to quickly build up your emergency fund.

Most financial people say a well funded emergency fund should contain around 3 to 6 months of expenses. These would mean a sum of $15,000 to $30,000 for the vast majority of people. That may sound like a lot but if you set up and keep a budget you will see rather quickly how much money you will need on a monthly basis.

Once you have this emergency fund in place it is to be left alone except for emergencies. A new couch or TV is not an emergency, but you can save money in addition to this amount for other things. The point is that this type of savings account gives you the piece of mind knowing that you can handle any financial emergency quickly and easily without resorting to falling back into debt.