Why You Need an Emergency Fund & How to Painlessly Create One

A financial safety net could help you avoid plunging into debt or robbing from your retirement account when you're short on cash. Find out how to start a fund that will keep your life and business running smoothly in times of trouble.

August 1, 2008

How will you pay the bills if the deal falls through and there’s no commission check this month? Or worse, what happens if your business pipeline is dry for two or three months?

It’s an ugly scenario that you must be ready to deal with, especially when your job doesn’t lend itself to predictable paychecks.

Today — as many housing markets chug along at an unhurried pace — it’s an especially relevant time for real estate practitioners to establish a financial safety net, experts say.

“Having an emergency fund can mean the difference between surviving or not surviving in the real estate business,” says Rick Salmeron, a Dallas-based certified financial planner who consults real estate practitioners (and is married to one). “You never know when you’ll hit rocky waters.”

The Risks of Not Having a Net

An amply stocked emergency fund can help you avoid plunging into debt or robbing money from your retirement account — and incurring big tax penalties — when you’re short on income or faced with major unforeseen expenses, such as big medical bills or a new roof.

“You never want to crash into your other investments just because you’re in between commission checks,” says Bert Whitehead, Bloomfield, Mich.-based financial adviser and author of Why Smart People Do Stupid Things With Money (Sterling, 2007).

Whitehead says real estate practitioners should set aside enough cash to cover four months of personal and business expenses. But Salmeron is a little more conservative, recommending six months’ worth.

To determine the target amount for your emergency fund, add up your monthly bills — including rent or mortgage, car payments, utilities, groceries — and multiply by four or six months. Don’t forget to factor in business overhead; if you can’t pay that, you’ll risk hurting your income even more.

5 Steps to Getting Your Fund Started

Your target figure “may seem impossible to attain,” if you’re staring from scratch, but don’t let that stop you from socking away money every month, Salmeron says. To get started: 

  1. Set up a separate account. It’s essential that your emergency fund is not attached to your checking account or ATM card. Otherwise, you may be tempted to “borrow” money when it’s not a true emergency, Salmeron says. Whitehead suggests putting the money into savings bonds, which are protected from leins.
  2. Contribute as much as you can. Determine how much you can afford to set aside each month. “There’s no right amount. You want to be able to put food on the table, but you also want to be building your fund,” Salmeron says.
  3. Treat it like a monthly bill. Whether it’s $50 or $300, be disciplined about putting that money into your fund. “It’s just as important as the mortgage bill or the electric bill. It’s something you must pay every month whether you’re selling homes or not.” If possible, have your bank automatically transfer the money from your checking account.
  4. Cut the fat. Beef up your monthly contribution by finding other places in your budget to cut back. Maybe opt for a less expensive cable TV package or eat dinner at home more often.
  5. Start now. It’s never too late to start saving up for a rainy day. Even if you start small, it’s better than doing nothing at all. “Identify your target amount, and start working toward it,” Salmeron says. “You’re buying yourself financial security and peace of mind.”
Kelly Quigley

Kelly Quigley is the former managing editor of REALTOR® Magazine.