Emergency Funds

Emergency funds are funny things. When we need them, we can't afford to build them, and when we don't need them, they are automatically built. Rather like health insurance – when you need it, you're rejected, and when you don't, it's easy to get. A smart way to create an emergency fund if you have a house is to take some of the equity in your home (assuming you have it) and get a Home Equity Line of Credit (HELOC). In the same way that you can use HELOC's to maximize the use of your money in debt reduction and wealth building, you can use HELOC's to create an emergency fund. The best time to get a HELOC is when you are fully employed, and your house has built up some equity. It is easiest to get it then, and you are likely to be able to get a good deal on interest and the amount you can potentially take. The good thing about a HELOC is that it is entirely flexible. You pay only when you take money out, and you can have it for a decade without ever using it — instant credit without hassles. And you have an instant emergency fund as well. Get one that covers you for 6 months worth of salary at the least, and preferably one that maximizes the amount you could take against your house. [See the explanation for why we would do that under investments.] Now you have an emergency fund and there is no real money involved just sitting there, doing nothing. Instead, your money can be out earning you interest.

If you don't have a home, or no equity in it, see if you can get a Personal Line of Credit (PLOC). Usually they are offered at banks or credit unions and it can serve the same purpose. Again, get one while you're working, or you'll have a heck of time getting one, and get the biggest you can, if for no other reason that it's less expensive interest if you have to use it than other sources of money.

If neither of these is available to you, start setting aside money from your salary in a savings account, preferably in a separate bank, so you can't just move it back into your checking without a hassle. (Most of us don't have the discipline to not touch the "untouchable" savings account, especially if you have several for different reasons — the car account, the Christmas account, the kids college account, etc.) Put the money away before you do anything else, even before you pay bills.