Building An Emergency Savings Account

Every personal financial expert says the same thing about emergency savings accounts—they are essential! But the problem is that most books, articles, and experts do not explain why they are so essential. In this article, we are going to discuss not only how to build an emergency savings account, but also why it is an essential step toward financial independence.

The Why

Our modern economy in the United States is built on consumer debt. This means that in order for the economy to be strong and unemployment to be low, Americans must continue to borrow and spend money. If Americans stopped borrowing, the U.S. economy would not be able to function. This is a primary reason why everywhere we go, we are constantly bombarded with marketing and advertisements that actually encourage us to borrow money we do not have to buy goods that we actually do not need. This economic truth is why it is so accepted in our culture to incur debt.

Debt, however, is a complete enemy of true, financial independence and should be avoided at all costs. The primary advantage of an emergency savings account is that you basically become your own lender. Once you build up an emergency account, you can always finance unexpected expenses with the cash in this account. This leads to the question, then, what if you do not have an emergency savings account? How will you pay for unexpected expenses such as emergency hospital visits, unexpected car repairs, etc? Most Americans pay for these unexpected expenses with a credit card. Therefore, building an emergency savings account is a first step toward true financial independence because it is freeing you from depending on anyone else (credit card) for financial matters.

The How

The best way to build an emergency savings account is to develop a plan. First off, you need to determine how much cash you want in your emergency savings account. The typical standard suggestion is to build it up to at least $1,000. A good rule of thumb is $1,000 as base, plus $500 for each additional family member.

To fund the account, determine how much cash you can deposit into the savings account each month. One way to fund the account quicker is to commit to cutting back on other areas of discretionary spending, and then shift that extra capital into the savings account.

For example, track all of your expenses over a 30 day period. At the end of the 30 days, sit down and look at your list of expenses. Determine where exactly you can cut down on your spending habits and then commit to funneling that extra cash each month into your savings account. If you have money with a forex broker or stock broker, consider using these funds to fund the account, as well.

Once you reach your goal for the savings account, commit to not touching this cash unless it qualifies as an emergency. If you are visiting Chicago and want to shop at Macy’s on Michigan Avenue, that does not qualify as an emergency! If you do actually experience a real emergency, then you should have a plan in place for how you will replenish the account. In this model, you are borrowing from yourself and paying yourself back at 0% interest. This is a small, but very meaningful, step toward true, financial independence.