Emergency fund…what was your reaction the first time you heard those words or rather when you understood them?Personally, I felt anxious to start building an emergency fund but as I read about it I got discouraged.
Everyone was giving their own ”textbook” explanation on how to build an emergency fund. They would talk about how much they sacrificed to do it.The problem is that everyone feels they are an expert in their own way and that’s actually true.Just that the same shoes can’t fit us all.
I can’t claim that all the information out there about building an emergency fund is not good for you,I just think you should make it work your own way.
What do I mean?
You can get a financial expert advising you to save $1000 in three months.That’s ok but what if you earn $100 per month or way more than $1000,say $100000.We are dealing with people who earn different amounts of zeros here and because of that,I can’t tell you a constant number you should save for an emergency fund.It will not be helpful for those who do not earn on the same margin.
You still with me?Great!
Let me guess,You are waiting to see my way of building an emergency fund?OK I promise to give my insights into that but first I’d like you to look at what you should do before starting an emergency fund.
Things You Should Do Before Starting An Emergency Fund
-The consequences of a financial crisis.If Will loses his job,he will be forced to go back to his home town and live with his parents.On the other hand Ryan who is the breadwinner and lives with his family in an apartment will become homeless if he loses his job.Ryan needs a higher emergency fund with more urgency than Will does.You have to assess your situation and see what you should do about it.
-Your expenses.The higher monthly expenses and the more the needs,calls for building a higher emergency fund.
-Regular emergencies to expect.Which regular emergencies do you expect..car repair?electronics damage?Assess all your asssets and imagine the what ifs.
-Worse case scenario emergencies.These will include critical medical emergencies like disability,cancer…These if you are in a tight spot of paying debt,can be postponed till you build a regular support emergency fund.
-Your type of debt.You may want to create an emergency fund but you still have debt.If your debt is a high interest debt you better create a smaller emergency fund plan while paying the debt quicker and vice versa.
-How is the risk of losing your job?You will be the judge of your risk to job loss but the riskier it is,I suggest a higher emergency fund.
2.Figuring what you’ll need.
Keeping those factors in mind you obviously have an estimate of how much emergency fund you should save.This includes something that can cover your monthly expenses plus the additional regular expenses.You know what really will work for you without putting much strain on your everyday life.If you decide to move to a cheaper apartment to fatten your emergency fund to a certain limit..I’ll say go for it.
The most important thing when you are building an emergency fund is figuring out how much you can have tucked away for you to feel financially secure.
3.What realistic duration can I be able to reach my desired emergency fund?
What is your income?You can’t convince me that you’ll be able to save $250 in a week while you earn $1000 per month unless you have a good side hustle.
Start small and exercise discipline during this whole process.You don’t want to start racing theoretically and get discouraged even before the practicals.Start small and gain momentum after some time.With that you will be able to come up with a realistic timeline to achieve your goal.
With all that in mind it’s time to deliver my promise.This is how anyone can calculate their starting emergency fund;
3months monthly expenses- 3M.E
Possible regular expenses(amount of the highest two i.e car repairs+electronics repairs/regular medical expenses)- P.R.E
This should be your starting emergency fund.Whether you are a high or low income earner,your emergency fund will amount according to the value of maintaining your assets and lifestyle.That way you’ll be focusing on financial goals that are realistic.
The duration to attain this amount should be your decision.All you need to know is that the earlier the better.Do your calculations and if you’ll have to reduce unnecessary expenses,it should be your goal,your decision.That way you can get the chance to understand your finances,and do right by them…no pressure.
After Building The Starting Emergency Fund,What Next?
Somewhere above we discussed Things You Should Look Into before Starting An Emergency Fund,right?Well,I need you to take a glance at the #2, figuring what you’ll need.
You have the amount you feel is the true definition of your financial security?Whether it’s $1000 or $100000,that’s the amount you will be pursuing after achieving the starter emergency fund.
By then I know you can program yourself to achieve your financial goal with no distractions.That’s what anyone should look forward to,financial security.
Where Do I Stash My Emergency Fund?
It’s time to decide where you’d keep these savings.It should be somewhere fairly accessible like a savings account,it doesn’t have to earn interest.
Do I stash my emergency fund in the same savings account with my other savings?Of course not.When you mix the emergency fund with other savings,you will be calling for trouble.All these names of savings like emergency fund,retirement savings and investment savings are so you can build boundaries.When you know this savings account is for emergencies,you won’t touch the money unless a financial surprise arises.Specifics are what builds more discipline and ambition in personal finance.
And not to forget, if you have a way you can automate your savings it will be better.You can set up automatic deductions of your salary to the emergency fund.You can also assume it as a bill and have it’s specific payday as all your bills.
If you grow your emergency fund to your desired limit and over,maybe two years worth you can decide to chop off some and put into retirement savings or investments.
What If I Am On A Tight Budget With No Money Coming In?
This is a common excuse many people have.If that’s the case then you are in big big trouble.This is the time that when an emergency strikes,your gap between financial failure and financial freedom goes from the existing 10 years to 15 years.
This is like saying I earn too little to save.If you think you have to maintain your lifestyle and you have nothing left to save,then it’s time you start looking for a side hustle.You don’t think so?
You may be a starting blogger,no financial support and your laptop is your business.The blogging business has not yet earned income and you are living on a tight budget.What will happen if you lose that laptop or it has damages?You will either get discouraged and drop the idea or you’ll learn the hard ways you can make it work.
I know some people can relate to this and if you are one of the people claiming ”I can’t save”,I hope I changed your mind.
Building an emergency fund may not be easy at first but with dedication of effort,discipline and patience you can make it.This way you sure can hope for a much secure financial future.