Pay Day Hawaii

PayDayHawaii is proud to work with America Saves this week–we’ll be focusing on ways to save or not waste money with blog posts every day this week!

Establishing an emergency fund should be a top priority for everyone. Maintaining emergency savings may be what makes the difference between those who manage to stay afloat and those who sink in debt or worse. If you keep a minimum of $500 to $1,000 (or more!) in savings for emergencies, you’ll be able to meet unexpected financial challenges, and not have your life fall apart.

Why should you set aside an emergency fund?

Here are just a few reasons:

• Car repair
• Clothes for a new job, or for school
• Home repairs
• Sudden doctor visit
• Dental work
• Parking or speeding ticket, or towing
• Emergency visit to relatives
• Tiding you over in-between jobs
• Utility deposits, or an unexpectedly high bill

Not only will you be able to handle an emergency, but you’ll also have peace of mind. You won’t have to constantly worry about what to do if this or that situation comes up.

What exactly is an emergency fund?

It’s a small amount of money, usually in a savings account (or under the mattress, or in a jar, or in a stack of prepaid debit cards). The important point is that you do not have easy access to it—no opportunities to drain it a dollar at a time. Saving for an emergency fund starts with small, regularly scheduled amounts that build the fund up over time.

Start building your emergency fund with a specific goal in mind. A general rule of thumb is to save enough to cover four to six months’ worth of expenses. But don’t get distracted and discouraged if you can’t save that much yet. It’s much better to focus on having enough to cover expenses when setting your savings goal, not on replacing your entire income.

Having an emergency fund also keeps you from being forced to take out high-interest loans that you may not be able to afford.

A Federal Reserve Board survey showed that low-income families with at least $500 in an emergency fund were better off financially than moderate-income families with less than this amount, or with no emergency fund.

The best, and easiest place to keep your emergency fund: A traditional bank or credit union savings account.

If you don’t have, or want, a bank account, think about these ideas:

• Pre-paid debit cards: add to one card, or “buy” a new one every month.
• Money orders: buy a new one each month—they don’t expire.
• Cash: The easiest way to set aside money, but be sure to use a fireproof lockbox.
• Risk: Remember that all of these last three have an element of risk: what if you don’t remember where you put them? What if your house is burglarized? What if there’s a fire? You have to take on another measure of responsibility.

Whatever savings account or method you choose, make sure you can access your emergency savings fund when you need it so you’re prepared for the unexpected.

How to fund your emergency savings:

There are many ways, and the best tactic is for you to add small amounts to your fund slowly. Don’t wait until you have $500 lying around to start your fund. Set aside some small amounts, and then get your fund started, in whichever way that makes sense for you.

Where does the money come from? Try these ideas:

• If you have a traditional bank account, set up an automatic transfer of a fixed amount into your emergency savings account.
• Save your pocket change—when you get home, put your change in a small-necked bottle (like a Sparkletts or Arrowhead large water bottle) so it won’t be easy to get out. Every six months empty it out and put the accumulated change into your emergency fund.
• Use your tax refund or Earned Income Tax Credit to start your fund, or rapidly build it up.
• Use Christmas and other holidays as an opportunity to save money for your emergency fund—take a look at what you spent the previous year, and start planning now how to cut that amount in half for the current year. Shop discount stores, look for special coupons and discounts, and be alert for sales on the items you are looking for.

There are many people who are living so paycheck-to-paycheck where a flat tire would send them into bankruptcy. An injured child or a natural disaster could easily be handled with emergency funds.

At least one study has shown that financial worries beat out to-do lists and work stress as reasons for losing sleep. However, there’s one sure way to avoid sleepless nights: keeping enough money saved to cover not only your bills, but also emergencies.

If the recent recession taught us anything, it’s that saving for a rainy day is a good idea.

America Saves is a campaign managed by the non-profit Consumer Federation of America. It seeks to motivate, encourage, and support low- to moderate-income households to save money, reduce debt, and build wealth.