How Prepared are You? Creating an Emergency Fund for when Disaster Strikes.

We’ve been reading the book The Total Money Makeover: A Proven Plan for Financial Fitness by Dave Ramsey.

Ramsey takes a revolutionary approach to financial fitness…get out of debt.

Wow!  Who-da-thunk?

Simple, straightforward…get out of debt. It’s unfortunate that we have a society that places value on buying things without having the means to do so. Let’s hope that we don’t take part.

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Payments on Pizzas

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Hypothetically, would you go to Pizza Hut and before ordering ask if they have a payment plan to finance your order?

Crazy, no?

Yet that’s exactly what happens when someone carries a balance on their credit card month after month. They’re making payments on pizzas (and a lot of other things like toothpicks)!

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Sunk but Looking Good

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Credit card payments may signify payments on pizzas but what about auto loans, are they better?

Nope, they’re worse.

Of course with loan for an automobile you may obtain a lower interest than a credit card but when you look at the dollar amounts involved, it’s insane!

People pay thousands and thousands extra above the original purchase price due to interest for a vehicle that will lose value faster than equity is gained.

Save for a car, then buy it, period.

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Home Ownership

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If you’re a home owner, have you ever wondered what life would be like without a house payment? Have you imagined the types of things you could do with that money?

Someone commented once, well if you make extra payments on a home and then lose your home, you lose the extra money you put into it. The answer to that is…put yourself in a position where losing your home would be very hard to do.

How do you not lose a home?

Have a large emergency fund saved up that will get you through difficult times (something we could all work on).

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Risks of Borrowing

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Some may think that for cash flow reasons, it’s a better choice to put things on credit…ah, hasn’t the recessions taught us anything? Anything at all? How many foreclosed homes and cars are out there?

Does buying “things” on credit really sound fiscally responsible?

How many people would have been better off to purchase a car they could afford and take the money they would have had as payments and put it into an emergency fund?

Once their emergency fund was, ahem, funded, they could take that money and invest it.

“I just don’t have enough to make ends meet.” If that’s the case, read Dave’s book, and you might find yourself inspired to make things happen so you do have enough to make ends meet.

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Creating an Emergency Fund, the First Step

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Create an emergency fund – a fund separate from all your other accounts reserved for emergencies.

We’ve enjoyed reading Dave’s book, which strongly encourages as the very first step to freedom the creation of an emergency fund and offers plans on building a fund.

The stories in the book are inspiring about people that sacrificed so that they could live debt free and create security.

Budgeting is an important part of getting control and creating an emergency fund.  Mint.com (owned by Intuit) is easy to use and ties into your accounts so you can categorize expenditures and create budgets.

There are many savings accounts you can use to create an emergency fund.

Keeping an emergency fund account separate from your bank that has your checking account might be a good way to preserve the fund for real emergencies.

The Orange Savings Account. Earn high interest. Great rates, no fees, no minimums. Start saving in under 5 minutes.

ING Direct (“Orange Savings” online) has a deal right now that if you are referred by a friend and open a savings account with $250, you get $25 and the referring friend gets $10, so if you’re interested in a referral link, let us know. (The ING offers and amounts change from time to time).

Whatever you choose to do, make sure you (and your spouse if married) are the one(s) choosing where the money goes rather than the money choosing where you go. And you can take that to the bank.