Every financial guru, planner, and do it yourselfer will tell you that you need an emergency fund. So I am going to chime in with my opinion on the subject; YOU NEED AN EMERGENCY FUND.
Not only do you need an emergency fund you need one RIGHT NOW. Not someday, not in a few years, not even in a few months; right now.
Just in case you didn’t get the urgency that I am trying to get across let’s look at why you want to have an emergency fund… yesterday.
Why You Need an Emergency Fund
Life is crazy. Crazy things happen. And when crazy happens you need to have money ready to take care of the financial problems that always seem to follow those crazy times in our lives.
If you don’t have an emergency fund and crazy happens what are you going to do to take care of the financial obligations that follow? It’s pretty simple, you are going to turn to debt.
The turning point in my life for my finances was when I got married. Amy and I went through Dave Ramsey’s Financial Peace University one month after we got married. This is when we started our first emergency fund and have had one ever since.
Before I got married, whenever there was an emergency I would have two problems. I would have whatever thing had just happened and a money problem.
The car breaks down, I had a car problem and a money problem. Break a tooth? Tooth problem and a money problem. Whatever the emergency is, if you do not have an emergency fund then you have a money problem to make life even more stressful.
Now imagine having a stash of cash sitting there waiting to swat those emergencies away. Now you just have to deal with the problem at hand and not worry about where the money is going to come from to pay for that problem.
Nothing breaks the stress level in your life like having enough money to handle the rainy days that life sometimes throws at you.
How to Start an Emergency Fund
Building your emergency fund is best done by having a budget. Now if you are a person whose eyes roll back in their head at the very mention of a budget let me use a different word, spending plan. All we are going to do is plan our spending before it happens. That way we can maximize exactly how that money gets spent.
Think of your spending plan as the engince for getting anything done financially. Now once your spending plan is in place you just make an item that “spends” money into your emergency fund.
If you are looking for ways to add extra income then head to my fast ways to make money page and start generating more revenue to complete your budget.
Where to Store Your Money
Where to put your money is an ongoing debate in the personal finance blogosphere. The best answer I can give you is to put it into an account that is not your regular checking account. The account also needs to be something where you can get to the money quickly. For this reason my wife and I use an online savings account. I do have friends who use high interest checking account where they can use a debit card. Either way make sure you get that money out of your everyday checking account, because money that sits in that account WILL get spent eventually.
What You Need if You Have Fluctuating Income
If you are a person who gets the same amount in their paycheck every month then this section does not apply to you. But if you own a small business or are on commission you know the stress of having an income that goes up and down with how well your month is goin.
To fix this stress you need a much bigger emergency fund. The way this works is you need to make up a budget that includes everything that makes your life run smoothly and is in keeping with your income. This includes saving for known upcoming expenses as well as things you want to do (vacations, etc.). Once you have that number you need to build up your emergency fund to include both money for emergencies as well as money for the months that don’t go as well as planned. For most people that is about 6 months of your budget.
This way, while your income is impersonating a roller coaster, your budget is sailing smoothly across calm waters.
How Much Should Be in an Emergency Fund?
If you still have debt then your next step is to get at least $1,000 in an emergency fund. When we do financial coaching, we recommend that people who have a house or children put $2,500 in an emergency fund if they also have debt. That is because houses and kids come with special emergencies that cost more.
If you are not currently in debt then a fully funded emergency fund is six months of your family expenses. Now do not mistake that for bills. Expenses are what your budget would look like if you cut everything to the bone and had to just exist. So if I wanted to calculate my emergency fund, my family can exist off of about $2,500 a month (this would not be fun). So we take that and multiply by six or $15,000.
Now that you know where you need to go your next step is to GET GOING. If you have some ways to help people get their emergency fund going leave them in the comments.