An emergency fund is a great idea, but you may ask yourself: How do I get it? How much should it be? Where do I keep it? Wonder no more. This week we look at what an emergency fund is and how building one is possible.
What is an emergency fund?
An emergency fund is simply money set aside for life’s unexpected circumstances.
One day it will rain and you are going to need an emergency fund. You may be reading this and thinking, “Well, that isn’t very positive. Be more positive!” Well, I am being positive. It is going to rain and you need an emergency fund (rainy-day fund) for the everyday emergencies of life.
Statistically, a person will experience a major financial event every seven to ten years, so you need to be prepared because you just don’t know when those emergencies will occur.
What is the emergency fund for?
It could be airfare to get across the country to be with family because of the loved one who passed away. It could be an unexpected illness that is more expensive than you planned for and now you need to be able to cover those medical expenses. There are a ton of situations I could come up with and a ton I couldn’t, but that is the point. There are inevitable and unavoidable emergencies and you just don’t know what they will be and when they will happen.
Additionally, singles should talk with their accountability partner or financial coach and couples should discuss these types of things together. Make sure you are on the same page regarding “what is an emergency” and “what isn’t” in order to avoid drama when it comes.
How much should you save?
If you’re just starting out this process and still in debt, you should aim to have $1,000 in your emergency fund. Why? Because, statistically, 90% of all emergencies are $1,000 or less. If you are out of debt, with the exception of a mortgage, increase that emergency fund amount to 3 to 6 months of expenses. In real estate or are a commission-based sales representative? You should have approximately 6 months worth of expenses saved. If you are a 9-to-5er with a steady salary, then a 3 month emergency fund will probably work for you. Consult a coach, like myself, to determine the right amount for your emergency fund.
Where should you keep the emergency fund?
Don’t bury it in the backyard. But, if you need to keep it in a sock drawer or a cookie jar, that is fine. I recommend you keep it in an actual bank account.
What kind of bank account? Well, simply, what we call an M.M.A. No, that is not Mixed Martial Arts. It is, however, a Money Market Account. Basically, it is a glorified savings account with some check writing privileges and minor limitations. You can write a few checks if needed, have a dedicated debit card, and even earn a little bit of interest; but, the point isn’t to make money. The point is to have self-insurance against life! Wealthy people self-insure and this is the first step. So, keep your money in a Money Market Account.
If you are going to keep it in an account, be sure it is completely separate from your checking account or else it will disappear, either gradually or all at once, because you’ll spend it. You want to protect this money and keep it for emergencies so you can protect your financial future.
So, how do I build an emergency fund?
It is time to start hustling, my friend, and I want to give you five simple tips that will help you get this emergency fund in place.
1. Adjust Your Tax Withholdings
If you have been getting a large refund each year, that is not a good use of your finances. That is, basically, a 0% interest loan to the government. Uncle Sam is not good at handling money if you didn’t notice, so adjust your tax withholdings. Sit down for a consultation with a CPA, make that adjustment, and put that extra money aside to build your emergency fund.
2. Temporarily Pause Retirement
What could you do if, for just a couple of years, you temporarily paused on paying towards retirement, got laser focused, and became more financially stable? If you were able to have cash in the bank to cover those inevitable emergencies, and were then able to make some financial progress what could you save for retirement then?
3. Requote Your Insurances
Has it been awhile since you were requoted on your auto, home, or other property & casualty insurances? Not only should you get requoted yearly because of the continual change in rates, but those shifts in rates and shopping around could save you hundreds of dollars a year. So, find a good, independent insurance broker and get requoted. All it takes is a few minutes to send them your declaration page and they’ll do the work for you. A little time can end up saving you a lot of money that could inevitably be put toward building that emergency fund!
4. Utilize Extra Checks and Bonuses
Whether it’s an annual bonus, an extra check of the month, or a gift you got for Christmas consider applying these as great, quick, turbo boosts towards accomplishing your goal.
5. Sell Some Stuff or Trade Cars!
I’m sure, like most Americans, you have stuff you can sell. So, sell some stuff! Also, consider trading in that car that is depreciating way too fast for a more manageable cash car, and freeing yourself from that car payment. Those extra funds could really help catapult you toward your goal of building that emergency fund.
Well, there you have it, five simple tips to save up an emergency fund. You’ll find that having an emergency fund in place turns what was once a crisis into an inconvenience.
I hope these tips have been helpful to you. Be sure to share them with others and download “The Money Finder” today so you can find even more money to save in that emergency fund!
Question: What is your emergency fund goal and how fast do you want to make it happen? Share in the comments below!