Building An Emergency Fund - Why? and How?
You may be asking yourself: Why do I need an emergency fund. Here is the answer: the stove, the refrigerator, the engine, the transmission, the gutters, the air conditioner in your home, the furnace, the windows, the water damage, and so on and so on. The End!
Just kidding. But seriously, I could stop this blog post right now and be finished. There are a thousand reasons you need an emergency fund, and I can’t list them all, but the bottom line is: everyone needs an emergency fund because emergencies will happen. You may want to hold off on vacationing, concerts, and spending money on things you want, and start planning and saving an emergency fund for what you will likely need someday. !
Murphy’s Law is real – If something can go wrong, it probably will go wrong. This is not being a nay-sayer. It’s being realistic! You should always prepare for the bad times during the good times. The whole point is, be ready. An emergency is right around the corner.
Some of you will read this and say to yourselves, “there is absolutely no way I can do this”. Well if you think you can’t, you’re right, and if you think you can you’re right. I’m not here to convince you of what you can and cannot do. That is up to you and your attitude, your drive, your willingness to sacrifice, and your focused energy. I’m simply here to tell you that anything is possible with laser-like focus.
Here are 7 things to consider when building your emergency fund
1. Be sure you can define an emergency. An emergency is not tickets to the next concert, a wedding gift that you forgot to get, or dinner and a movie that you failed to budget for. Understand what a real need is and how that need differs from something you just want at the moment. My definition of an emergency is whether or not the “need” is associated with your health or well-being. Does it affect you, or your children’s, food, water, shelter, or transportation? Use precaution here!
2. Where should you stash your cash. Don’t try to invest with your emergency fund. Your money in your emergency fund MUST be liquid and readily available at any given time. This is crucial. Don’t keep it in cash under your mattress, but don’t try to invest it in an index fund somewhere either. Just make it available in a savings account, a checking account, a money market account at the local bank, or just somewhere that allows you access to it immediately.
3. The principle is more important than the specific amount. My suggestion is to start with one-month worth of expenses. If your monthly expenses are $4,000, then start with an emergency fund of $4,000. If your monthly expense down to the bare bones is $2,500, then start there. Then take your monthly expenses, and multiply it by 3 months minus the thrills and frills. What is that amount? Then multiply your monthly expenses by 6, without the frills and thrills. Somewhere in between those two numbers is the range of money you want to ultimately have in your emergency funds. If you only want to have enough money in your emergency fund for one month to start that is fine, but ultimately you need to push that up. The key here is that everyone’s amount will be slightly different, and the concept of having an emergency fund is more important then whether you have 2 months worth or 12 months worth. You figure out whats right for you.