I use the “secret accounts” phrase completely tongue-in-cheek. I decided one day to set up an emergency account and told my husband about it, but he apparently wasn’t listening to me. One day I showed him how much we had saved and he asked when I went off and got a secret account. Ever since then it has become a big joke between the two of us and when we get extra money, he always asks if I plan to store this in my secret account.
In all seriousness, creating an extra account for the extras in life can be an important way to save yourself some money. The money gurus encourage you to set up funds in other accounts that you can easily have access to and to prepare for those big things in life. Check out books from Dave Ramsey, Mary Hunt, or Suze Orman for great ideas on establishing your own emergency funds.
For example, start keeping track of all of the receipts on home improvements you have made during the year. At the end of the year, tally up how much you spent and divide the number by 12. That would be your goal to set aside for the next year for home repairs. This will save you interest and fees that you would incur from putting these expenses on a credit card. This same scenario can be applied to auto repair, Christmas gifts, medical expenses, taxes, etc… These “emergency” situations come up when we least expect them and it is nice to have that money socked away for those rainy days. Sometimes we know these situations will arise (a family vacation or Christmas) and we end up putting them on our credit card even though their arrival was looming all year long.
This month alone we had the car in the shop twice and, of course, both times these visits were unexpected. Thank goodness for that super “secret” account that we set up.
If you aren’t a good saver, have the bank set it up to be automatically taken out. Even if you can only afford to take $25 out of your account each month, that is $25 that you can use when an emergency arises.
If you are more disciplined, you can use the snowball technique towards your savings, provided your debts are all paid down. If you pay your credit card or car loan off, for example, start paying yourself that same amount and moving those funds into your emergency account. You won’t feel the ouch factor if you were already taking that money out anyway.
These accounts can be great for the bad things in life, but they can also be wonderful for the good things in life. We have a vacation account set up and I am hoping that we can go somewhere really special for our ten year anniversary. We have the money automatically taken out and moved into our vacation fund each month.
Here are some more great articles on creating emergency funds:
Bankrate’s Simple Formula for an Emergency Fund
How to Create an Emergency Fund Now
About.com Emergency Fund Guide
6 Ways an Emergency Fund Can Help Your Budget
The Emergency Fund
Potential Monthly Savings: $30 or more
Sound Off: Do you have an emergency fund? How did you determine your budget for this account?