Making an Emergency Fund
It seems no one likes talking about their finances! I’m not sure if it is my line of work or just most people I talk to have no clue on how to improve their financial situation. Well, I’m here to give you some tips on one of the most important things in changing your “luck” with money. Starting an emergency fund is the first step for most people to change how they think about money, and how money can start being an asset to them instead of a liability!
What is an Emergency Fund?
When it comes to finances, as most things in life, bad things tend to happen to the people who are not prepared for them. It seems to be a fact of life for people who are down on their luck! It’s hard to catch a break! In planning for your financial future a small bump in the road can throw you off for months and leave you way behind. This is where an emergency fund comes into play. It covers expenses in emergency situations so that you aren’t taking money from your saving or investing goals.
Water heater breaks? Your husband was laid off from his job for the winter? Your car needs a new transmission? These are all reasons to tap into your emergency fund, and you’ll be glad you have it. Let’s look into some specifics about starting and managing your emergency fund.
Why Have an Emergency Fund?
This one is honestly pretty simple. If you are anything like me and your finances weigh on your mind frequently, then having a backup stash of cash will bring great ease to your troubled mind. If you are also like me, you may find that you also have a tendency to want “too much” stashed away that could be better used elsewhere. If, for example, you have twice what your emergency fund needs to be, but are still paying $500 a month car payment, your funds may be better suited to paying down debt. Having set amounts for your emergency fund gives guidelines to the spender and the ultra saver alike!
How much Should I Save in an Emergency Fund?
There are many schools of thought on how much money your emergency fund should consist of. They almost all boil down to between 3 to 6 months of your family’s expenditures. So let’s bust out your budget and look at what your monthly bills are.
You may be tempted to leave out some of your expenses and that is ok. If you can pay monthly for something like a gym membership and you can cancel it for a few months until you rebuild your emergency fund, that is fine. But don’t expect that you are going to cancel your internet, cell phone plan, and cable to replace your car’s transmission, that’s just not going to happen and will be far too much trouble. Just count those into your total expenses. Now that you have your number multiply that by 3 and then 6 and now you have your range at where your emergency fund should be.
If your family has 2 incomes and you both have had a steady jobs leaning more towards 3 months is probably more appropriate. This is because if one of you loses your job it is likely the other will still be able to work. You will only be withdrawing half of your monthly expenses from your emergency fund, allowing for it to last twice as long.
When you look at this number it may be shocking how much you need to support your family for just a few months. This is the perfect time to also look at your budget and see if there is anything that doesn’t seem so important to you, and could possibly be cut from your budget!
Where Should I Put my Money?
There are multiple options here for where you can stash your extra cash away for a rainy day. There are just a few criteria you want to ensure for your emergency fund.
Quick Access
The first and most important is that you have quick access to this account. You do not want to be waiting 3-4 business days for your money while your wife is wondering when the water heater will be fixed and she can get a hot shower again! This one can be tough for us investor types. It’s hard to see that money just sit there during a roaring market, but we must remember this money is for emergencies and quick access is paramount.
Safe and Secure
It is also important to remember your emergency fund is not an “investment” or day trading account. The way things work, you are going to need your money around the same time the market takes a downturn, and now you are going to be selling your investments at the worst possible time. That is why, even though it kills most of us, having your money in a savings account, that gives very little return, is going to be the best spot for your cash.
How to Save for an Emergency Fund
There are many “tricks” on how to save money, but all of them share the same thing in common. You have to set a goal, and you have to be consistent with the plan you have set in place. Check out my blog post on creating wealth for a more in-depth way of increasing your savings. If you can reduce your spending, and increase your income (working overtime), you can get to your saving goal much faster than you think. It is just some short-term pain for long-term peace when it comes to your financial health. Check out this savings calculator I like to use to see how long it will take to reach my goals.
When it comes to seeing my friends and colleagues struggle this is something that I believe would probably help most of them the most. A lot of what I’ve seen personally, with people who struggle with money, is that they tend to continually face financial hardships, and feel they can never get ahead. If they would just take the time to build an emergency fund, I personally feel, it could possibly stop “the bleeding” and allow them to take a financial breath. This of course is only an opinion and you never know what people are going through in their personal lives. Take a minute and read more bad habits of people who are bad with money, and make sure you are avoiding everything on the list.
If this article helped you or you have any insight on starting an emergency fund post a comment below. I love hearing people’s stories about making good financial steps for themselves and their families.
I find it very difficult to put money into a savings account instead of an investment account. Thanks for the info!