Twice since establishing my emergency fund last August, I’ve drained it (or nearly drained it). First to fix my car when the anti-lock brakes, break pads, alignment, and tires were shot, and then again a few weeks ago when my tax bill came due. Both times, I was extremely glad to have my emergency fund on hand!
Obviously I think an emergency fund is important for me – you can tell just from the fact that I have one and have used it. But is it really just as important for my fellow college students?
If you own any object that you have come to rely on, but would be costly to replace or repair, then you need an emergency fund. Nearly every college student I know has a car or a computer – most have both. But very few of them could cover the cost of a major repair without feeling the pain. And while some people are currently saving up for their next computer, most of them would be screwed if their current computer gave out and they had to replace it today.
Wouldn’t you like to be smarter than that? Wouldn’t it be nice to have some cushion against catastrophe?
Sure, you might have your parents to lean on in times of crisis. Then again, you might not. What happens if one of your parents loses their job, and then your car breaks down? Or maybe your parents will decide that replacing a broken computer is your responsibility now that you’re at school. These things may not happen, but the ability (or willingness) of your parents to bail you out is not guaranteed.
Not to mention that showing some financial responsibility is the best way to convince your parents to help you out! My parents offered to pay for half of my car repair back in November, since they knew I could pay for the other half. By showing willingness to take responsibility for my car, I impressed my parents enough to get some additional help from them.
And setting up an emergency fund can really be quite painless.
Make it automatic. Figure out how much a month you can give up and have it automatically moved from your checking account to savings every month (this is easy to set up online at most banks). Even if you can only put aside a small amount (like $10 a month) it will add up. And it’s a good start, anyway – you can always increase the amount per month later.
I keep my emergency fund in a high yield savings account at ING Direct. I used a $250 student loan refund to start the account, and got a $25 bonus. You can too, using one of my ING referral links. If you decide to go that route, I suggest you start your emergency fund in your regular bank savings account, until you’ve saved up the $250 to start an ING account, and get the $25 bonus.
Define what constitutes an emergency.
I’m not going to tell you exactly what you should do with your money, but your emergency fund will serve you better if you set up some rules for it. Most personal finance books say that an emergency fund shouldn’t be for car or computer repairs – that you should anticipate these expenses and set up separate funds for them. But while I’m still in college, I find it easier just to have an all-encompassing emergency fund, and allow myself to use it for these expenses, as long as they’re necessary. Once I’m out of school and have greater income, I’ll start separate a repairs fund.
But “necessary” still doesn’t include things like say… spring break in Cancun. Rather, an emergency fund should be for if you end up stuck in the airport trying to come back from Cancun, and you suddenly need to buy an emergency ticket to get home. If you drain the fund for the trip itself, you won’t have the fund to help you if an actual emergency occurs!
The best emergency fund is one that you never have to use.
Part of your emergency “fund” should be the smart handling of objects you can’t live without. Pick up an external hard drive (or some blank DVDs) and make backups of the files on your computer. Take good care of your car – get the oil changed when you should and get it checked out regularly.
I know this is some common sense-y stuff, but the hard part is remembering to do it. When you’re in crisis mode, dealing with a dozen project deadlines and club activities and an on-campus job and… everything else… preventative stuff takes a back burner. The best thing to do is pick an hour a week, and set it aside for taking care of things that are important – but not urgent – like preventative maintenance.
Start your emergency fund now, and you’ll be miles ahead of the game.
The best part is that you’ll have that emergency fund started already when you graduate. Sure, you’ll probably need to expand it for your new, post-graduate lifestyle, but you’ll already be two steps ahead of everyone else. Most people don’t realize until years after college that they need an emergency fund, and once they do, most people still don’t make one. You’ll already know you need one, and have one started!
I know you’ll be thanking me for this later!