The New Year is usually when we make new resolutions. Getting off to a sound financial start should be no exception and we have plenty to encourage you to embrace financial security in 2008 and beyond.

One of the most important steps in building your personal financial status is to establish an emergency fund.

It is important to prepare for any unexpected emergencies that would disrupt your budget with little or no advance warning. For instance, if you or your spouse became unemployed, how would you cover the income shortfall? Hopefully, this will never happen to you, but catastrophes do happen. Therefore, you will agree it is a good idea to set aside an adequate amount of money for emergencies only.

To get started you will need to gather some information about your routine spending. Basic financial analysis of your routine spending each month is critical to this process. At least you should have created a household budget worksheet. You should analyse your budget to know your annual spending on mortgage/rent, insurance premiums, utilities, food, loans, and credit cards.

A rule of thumb is that an emergency fund should cover three to six months worth of your basic living expenses.

You could calculate your emergency fund limit on a prorated monthly basis.

For example, if total annual budget spending is $24,000 for one year.

Your monthly expense will be $2,000 (i.e. $24,000/12 months)

Your emergency fund limit will be $6,000 to cover three months (i.e. $2,000 X 3)

Open a savings account at your bank and start by adding the amount you set aside each month as savings in your budget. Whenever you end up with excess cash (budget surplus) put some of that into your emergency savings account. Your savings should be liquid because you will need to access it quickly in an emergency. For this reason you must limit investing your emergency funds to low risk savings accounts. You can maximize your return in this environment by putting your funds in the bank offering the highest interest rate on savings accounts.

The most commonly cited reason for purchasing insurance coverage is to avoid significant out-of-pocket expenses in recovering from a catastrophe. Do not be lulled into a false sense of security; insurance may not cover a significant portion of your expenses.

You should read your polices to verify your coverage. If you have had any experience in filing an insurance claim, you may have seen your premiums increased as a result. To protect against increases in your premium, it may behove you to pay for the repairs without relying on your insurance policy. If you have an emergency fund available for this purpose you can avoid using your insurance and thereby keep your low premiums.

An emergency fund requires financial self-discipline. You will find that an emergency fund gives you a great boost, both in your self-confidence and in your financial status. Once you have accumulated the money to fund your emergency account in full, you can pursue other financial goals.

In our example you will have $12,000 in your fully funded emergency account to cover six months. The financial self-discipline you exercised to build the fund should continue to stop you from spending it. Your next step is not a withdrawal to pay down on a car or a lavish vacation. These funds are for an emergencyies only.

This entry was posted on Tuesday, January 15th, 2008 at 11:47 pm and is filed under lifestyle. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.