Getting Your Shit Together
This blog is aimed at people trying to get their financial shit together, people who have money, or want more of it, people trying to make the most of their financial situation, trying to reach a state of financial wellbeing. Within that scope, I try to tackle a variety of topics while not assuming where each individual is on their own journey. Afterall, we are all in different places in life. As such, I would like to talk about the emergency fund. It may seem basic, but I know not everyone has one. It’s really the starting point of your journey to financial health, so it warrants discussing what it is, why you need one, how much it should be, and most importantly – how you can make your own emergency fund if you don’t already have one.
The Paycheck to Paycheck Cycle and Lifestyle Creep
Most Americans are living paycheck to paycheck or close to it. A surprising number of these people are folks who make a decent amount of money – they are well above the poverty line, but continue to struggle with saving money. One reason people fall into the paycheck to paycheck cycle even when making good money is because they come to believe they will always have this money; they are secure that the money will continue to flow so saving up does not feel that important. Another reason well earning people fall into this category of paycheck to paycheck living is lifestyle creep. I’ve written about that insidious little bastard before, but basically, it is when your standard of living slowly creeps up along with your income, making it feel like you’re never earning enough money.
What Is an Emergency Fund?
Regardless of why or how you got in your situation if you don’t have an emergency fund, you need one. For sake of clarity, when I say “emergency fund” I mean a specific amount of money set aside just for emergencies. This emergency fund is what stands between you and the world trying to screw you over. Have you heard of Murphy’s Law? It states that “what can go wrong, will go wrong”. It’s real, and your best defense against the world and Murphy’s law screwing you over is… An emergency fund.
Why Do You Need an Emergency Fund?
All sorts of things can bring on the need for an emergency fund. It might be a costly car repair, or maybe the heat on your home goes out in the dead of winter. Maybe you get laid off, or maybe there is a surprise pandemic that puts millions of people out of work for weeks at a time. For people with an emergency fund, these challenges can be more easily overcome than for those without one. Those people without an emergency fund may have some hard choices to make. Car repair or heating bill? Rent or food? Those are some tough choices that you can avoid having to make if you have a healthy emergency fund.
How Do You Make and Emergency Fund?
I find it helpful to establish an emergency fund in two steps. The first step is a baby step and is a fund of $1000 dollars. If you have no emergency fund right now, that may seem like a tall order. It is – but know that it is 100% achievable and it can and will save your butt someday. It’s worth it to start working toward that fund now. If you are wondering how you could possibly come up with $1000, that’s okay too. It comes down to decreasing expenses or increasing income, or both! But that’s a topic for a different blog post.
Growing Your Emergency Fund
Once you’ve got your $1000 emergency fund, it is time to move on to the 3-6-month emergency fund. You’ll find it isn’t so hard to achieve after you’ve racked up that first $1000. For your 3-6-month emergency fund, you want to calculate what your monthly expenses are (everything from rent or mortgage to food and toiletries), and multiply that number by 3. So, if you spend $3000 per month on living expenses, then your 3-month emergency fund would need to be $9000. Depending on your risk tolerance and occupation, you may want to choose a 6-month emergency fund. Its up to you, but keep in mind, the more the better. This fund is meant to protect you in case of unemployment or prolonged illness. Make sure you are accurate in assessing your expenses here, if you underestimate your expenditures, you may find that you don’t really have 3 months expenses saved after all which could be an unfortunate wakeup call when the time comes that you need it.
Parting Thoughts
Everyone needs an emergency fund. You never know what the world has in store for you. Having a healthy emergency fund can prevent you from enduring hardship and can save you in an emergency. Whatever challenges you face, having an emergency fund will make them less. It is worth it to find a way to build your safety net – whether it is reducing expenses, increasing income or both, you will not regret creating your own emergency fund. When the time comes that you need it, you will be infinitely grateful that you took those steps and gave yourself a buffer between you and Murphy’s law.