An emergency fund is critical to your success as you work on slaying your debt. An emergency fund is your protection against unexpected events in life. When you don’t have an emergency fund everything becomes an emergency! Something relatively minor such as a flat tire or a broken toilet can lead to panic and you will find yourself reaching for Visa or MasterCard, or borrowing money from family or friends.
If you are in a hole, stop digging! It’ll be impossible to avoid accruing new debt if you have nothing saved for emergencies.
Without an emergency fund something major like a job loss or an unexpected illness can be downright disastrous. Start your emergency fund today and protect yourself and your family against disaster.
How much should you save in your emergency fund?
The answer to this question depends on your individual situation. A single person that doesn’t own a home or have children will probably need less money in reserve compared to someone with children and a home. It also depends on the stability of your current job.
Financial expert, Dave Ramsey recommends that you start by developing a starter emergency fund of $1,000. This might not sound like a lot of money but considering the fact that nearly 50% of Americans have less than $500 in savings, $1,000 seems like a reasonable place to start. The ultimate goal is to have at least 3-6 months’ worth of expenses set aside for emergencies. But while paying off debt the first goal is to save $1,000. You can go back and build up your emergency fund after you pay off debt.
Where should you keep your emergency fund?
An emergency fund should maintain liquidity. In other words, your money should remain fairly accessible. If an emergency takes place you don’t want your emergency fund tied up in investment accounts or certificates of deposits (CDs). Also, don’t make the mistake of keeping the money too accessible-e.g. don’t keep it under your mattress or in a shoebox! If the money is too easy to access you will be tempted to spend it. A new pair of shoes is not an emergency!
A simple savings account will work perfectly fine. I recommend an online savings account so that the money is not too accessible (see the recommended viewing section below for tips for starting an online savings account).
What can I do to build my emergency fund quickly?
As you work on developing a budget and tracking expenses you will likely find several areas where the fat can be trimmed. You are probably spending hundreds of dollars a month on impulse purchases, convenience foods, and dining out.
Ways to save cash quickly:
1. Sell stuff.
You probably items in your house that you don’t use, that can be sold. I have sold used books and sold clothes to consignment shops to generate extra cash.
2. Participate in a financial fast or no-spend challenge.
A no-spend challenge you will help you reset your spending habits and save cash that might otherwise be spent impulsively on a whim.
3. Work overtime or get a side hustle.
Learn more about the secret weapon in your financial arsenal…
4. Automate it.
Set aside $40 per paycheck (assuming you get paid bi-weekly). Within a year you will have over $1,000.
5. Take advantage of windfall money.
Save $1,000 from your income tax refund (if you get one). Hold off on that new furniture for now!
In conclusion, remember to get creative and get aggressive with saving for emergencies. Life will happen, so do what you can to be prepared.
The habit of saving is itself an education; it fosters every virtue, teaches self-denial, cultivates the sense of order, trains to forethought, and so broadens the mind. –T.T. Munger
What do you consider an emergency?
How long would you and your family be able to stay afloat if you lost your job today?
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