Bankruptcy Alphabet: E is for Emergency Fund

Posted by on Dec 19, 2011 in Personal Finance | No Comments

Continuing down the alphabet, we are at E for Emergency Fund.

You probably have heard the old adage “pay yourself first.” Maybe you are like most clients I work with that say “as soon as I pay off all my of debts, I’ll start saving.” While this may seem like sound logic, consider the following – if you are on the “pay every extra dime towards debt” boat, this means that there is nothing in reserve for life’s unexpected events. And if there is one sure thing about life is that unexpected events will happen. Maybe, you tell yourself, I barely have enough money for all of my expenses. There is no way I can save.

Here is the thing about saving. The amount you have saved is not directly related to the amount of money you earn. Obviously, if you earn $200,000 per year, it will be easier to save than if you earn $40,000 but I’ve seen clients earning $40k have more in retirement savings than those earning $200k+. Here is the simple rule for saving. Spend less than you earn. I know. You’re probably rolling your eyes. It’s a rule that everyone knows, but not everyone practices. The second option is to earn more.

There are endless number of expenses you can reduce or eliminate to save money. There are hundreds of books on the topic. But here is the key – it starts with a mindset. Let me explain. Let’s suppose you decide you are going to save $1,000 in 2012 (a great New Year’s resolution) for emergencies. That works out to $83.33 per month or about $20 per week. So, you make a list of all of your expenses and realize you are actually $100 short each month. Meaning, you have to close the $100 gap in addition to coming up with an additional $83.33. After reviewing your expenses, you decide to reduce your monthly clothing spending and food budget by $200 to bridge the gap. You pat yourself on the back for coming up with your plan.

The next day, you go grocery shopping. This is the hard part. What do you not buy in order to save? What sacrifices are you willing to make so that you are no longer living hand to mouth? In order to save, you have to become frugal. What that looks like is up to you.

  • Maybe, you stop buying a cup of coffee everyday, and instead, brew your own.
  • Do away with soda, or get a 6 pack instead of a box (box of what?).
  • Buy a roasting meat instead of filet mignon.
  • Use rags instead of paper towels.
  • Skip on beer and wine (Okay, let’s compromise.  Maybe a little less).
  • Pack your lunch.

If you do the math, these small changes should add up to a savings of $10+ each over a course of the month.

It may not look like much. $1 here, $1 there. But, like any journey, it starts with the first step. So, what does your emergency fund savings strategy look like for you?

Other E’s from Bankruptcy Attorneys

Early Preparation
Emergency Filing
Equitable Distribution
Executory Contract

Image credit: Leo Reynolds