Perhaps the most important thing you can do to protect your finances is to save an emergency fund. Having an emergency fund can be the difference between a blip on the radar and a complete financial meltdown. Protect yourself, start saving money for an emergency fund.
What is an Emergency Fund?
An emergency fund is money set aside in case of an, you guessed it, emergency. You are not to touch this money unless it’s an emergency. And no, Bloomingdales having a huge door buster’s sale is not an emergency. Sorry.
So, What is an Emergency?
This money is meant to be used for unexpected expenses only. Things like a trip to the emergency room that your insurance won’t cover or an unexpected car repair are good reasons to dip into your emergency fund.
We hope nothing bad happens to you so you don’t have to use your emergency fund. But life happens. Be proactive not reactive.
It’s also good to have an emergency fund in case you lose your job or your business. Even if you find a new job relatively quickly, having no money at all coming in can be a huge burden.
With no emergency fund, you may be forced to rack up a bunch of credit card debt just to survive, and with those insane interest rates piling up, it can take years to get back on your feet financially.
What is Not an Emergency?
OMG did you hear about the new shoes that Nike just released? They’re so cool and they’re only available for a limited time!
Yeah, that’s not an emergency. You will not die if you don’t get those shoes.
The holidays can be an expensive time of year. Wouldn’t it be great to dip into that emergency fund for some extra gifts?
No. That’s not an emergency either. The holidays are not a surprise. They come at the same time every year. The same goes for your property taxes, your water bill, and your regular car maintenance.
These kinds of expenses should be already accounted for in your budget.
An emergency fund is something that you do not touch unless it is an actual emergency.
How Much Should You Save In Your Emergency Fund?
Your emergency fund should be big enough to cover six months of essential expenses. We know, take a deep breath. It sounds like a lot.
Note the word “essential.” In a financial emergency, you can eliminate expenses like gym memberships, Netflix subscriptions, and eating out.
We’re talking six months’ worth of essential expenses like housing, utilities, food, and car payments.
Why So Much?
The average cost of an ER visit without insurance or before the insurance will kick in in some cases is between $150 and $3,000. If you require surgery, that number can go into five or even six figures.
The average car repair bill is between $500-600.
Some financial experts only recommend saving for three months of expenses so why are we telling you six? Because it could take months to find a new job if you lost your current one. And it’s always better to be over prepared for whatever life throws at you.
Research shows it can take one month for every $10,000 you require in salary to find a new job. That means if you are looking to make $50,000, it can take five months to find a job at that salary.
If you’re living paycheck to paycheck, any of these things could put you in debt for months or even years. That’s why six months is the platinum standard for an emergency fund.
The First $1,000
Here’s why this is more important now than ever. 61% of Americans do not have the funds to cover a $1,000 emergency. And according to a 2017 Career Builder report, 78% of Americans live paycheck to paycheck.
The majority of people are not prepared for an emergency. Think different and take action (aka don’t be the majority, have the Minority Mindset, and start an emergency fund).
Like any goal, building an emergency fund can be broken down into small steps so it’s not overwhelming. If you had to eat an elephant, how would you do it? One bite at a time – right? The same applies here.
The first step is to save $1,000 as fast as possible
There are essentially three ways to build an emergency fund, make more money, spend less money, or do both.
You have a handful of ways to make more money. Pick up a side hustle; drive for Uber, rent your place on Airbnb for a few weekends, get a part-time retail or bartending gig.
Or if you want something with even more opportunity, you can start a business or start investing.
If you already work as many hours as you can, you’ll have to cut back on spending. We all know what the usual suspects are when it comes to overspending; food and fun.
Cutting back things like going out to dinner and meeting friends for drinks will help you reach your first $1,000 quickly.
Cutting small expenses can add up too. Stop buying snacks and drinks when you get gas, don’t buy coffee on your way to work every morning, and bring your lunch rather than buying it.
If you make more with your side hustle and spend less by making even small cuts, you’ll hit that $1,000 in record time.
The Rest of the Thousands
The reason the first $1,000 is the hardest is because you might not be used to working more and/or spending less. But once you get started, you see that it’s not so bad.
Are you watching TV and playing video games in your free time? Side hustling is better for your wallet and your state of mind. It gets you out of the house and into the world.
And living like you’re in an emergency situation when you aren’t will prove to you that you can do it. If you did lose your job, you already know that you can live on less.
What you want to remember is, just because you have money in your bank account doesn’t mean you have to spend it! Living below your means is essential to building a strong emergency fund.
Where to Stash Your Emergency Fund
Your emergency fund needs to be somewhere that is both safe and immediately accessible. It won’t be safe stuffed under the proverbial mattress so don’t even think about it.
This is when your bank account becomes very useful. Create a separate account for your emergency fund. It’s important to have a separate account because, remember, your emergency fund is money that you do not touch unless it is an emergency.
If you’ve been reading our other articles and watching our videos on YouTube, you might be a bit confused because you’re losing value in the bank due to inflation. While that is true, ease of access is more important than growth of your emergency fund.
You can read our free eBook on money and investing to see how you can grow & invest the money that’s not going in your emergency account.
Peace of Mind is Priceless
Building an emergency fund takes time and sacrifice, but anything worthwhile does. An emergency fund is the solid foundation beneath all of your personal finance goals. Once you’ve done it, you’ll understand that the peace of mind it gives you makes that sacrifice worth it.