Emergency Fund Basics
Saving money can be tough with bills, expenses, and life changing every 5-minutes. Being prepared to deal with the unknown is important no matter where you are in your life. An emergency fund is a cash cushion to protect you from negative financial events or outcomes. This could be anything from losing your job, large house expenses, car troubles, or anything else that could be a large ticket item.
Creating and budgeting for an emergency fund will be a critical item for you and your financial future. Being able to pay for unexpected circumstances in cash right away can help you to avoid creating large amounts of debt. Face it, things don’t always go exactly the way we plan. I must catch myself sometimes as it’s easy to picture something in my mind, yet a totally different outcome will occur. Nothing is perfect and circumstances don't go as we might assume.
The idea of an emergency fund sounds great on paper but how much cash will it cost you? The short answer is to start with a small $1000 fund. This is a good started for those who still have large sums of debt from student loans, credit cards, or anything else. This will act as a small buffer but will still not cover any major emergencies, such as losing your job. If you are in a better position financially and are making some decent money you will want to aim for 3-6 months of expenses.
Don’t know how much your expenses are per month? Go back and visit our blog on How to Create A Budget! Here we go into details about why you need a budget, what it is, and some ways to get started. If you want even more information on money, please check out our newest book Optimal Wealth. Here you will learn all the money fundamentals you need without feeling bored or confused.
Back to the 3-6-month emergency fund information… If your expenses are $2000 per month you will want to aim for $6000-$12000 in savings. This way you will be able to fully survive; pay bills, rent, car, gym pass, phone, and whatever else for 3-6 months without a job whatsoever. Maybe you don’t lose your job, but your cars transmission explodes, and you need $3500 to fix it, to commute back and forth to work daily.
Now that you know how much to save, how exactly do you go about saving? Check out one of our previous posts How to Save More Money. We go into more detail about ways to save on monthly bills to keep more of your hard-earned money! Learning ways to save money is detrimental to financial freedom. If you want to get out of that paycheck to paycheck cycle you are living in then saving will become a valuable habit (literally).
Let’s say you are aiming to save a total of $6000 for your emergency fund. $6000 bucks can seem like a decent chunk of change to be lying around but key for your financial security. If you aim to save only $200 per month for a timeframe of 30-months or 2.5 years, you will have your fund complete. The best way in my opinion to save this money is to setup a monthly automatic transfer. If you get paid on the 15th, setup a transfer date of the 17th each month for $200 to transfer into your savings account. This will give you a 2-day buffer in case something happens to your paycheck on the 15th. Planning to save this money each month no matter what and not considering it as part of your monthly income is key. If it transfers right away and you’re not “counting on it” so to speak as spending money, it will be a breeze to save.
What if I Spend It?
Your emergency fund is for exactly that, for emergencies. Under no circumstances (other than actual emergencies) like stated early should you spend one cent of this money. If you start using it for a trip, nice clothes, or Christmas presents you will continue to consistently spend it… If you do spend a chunk of your money on say a $3500 car bill, that is fine. It is meant to do that and is serving its purpose. If this happens don’t sweat it, fix what you need and then budget accordingly to build the fund back up to your full desired amount.
You will soon realize that once you have this fund in place it gives you a nice “security blanket” feeling. Not only will you be covered financially if anything happens, but you feel more secure and free mentally as well. Having spare cash at the ready if anything goes wrong gives you peace of mind. This security and freedom is what most people are often chasing when they want to get “rich”. It’s not necessarily more money that will give you this feeling but having a system in place like this which will really help you out.
So, what do you say? Are you ready to start saving for your fund? If you already have a head start, then great! Budget accordingly to build it up to a full 6-months worth of monthly expenses. If you are making good money and want an even bigger cushion you could even save 12-months of expenses. This would give you the ultimate blanket in case something was to drastically change.
Be sure to check out our other blog posts are well as our newest book Optimal Wealth. We know you will gain valuable information to transform the relationship you have with money! Be sure to follow us on Facebook, Instagram, and YouTube. You can also subscribe to receive our weekly BLOG right to your email at www.youroptimallifestyle.com/free.