Emergency Fund

My Confession

I got away with murder.

Many years ago, I got my first job out of college. It paid $35k/yr. I had debt. About a $120k worth to be exact. I was young. Free-willed. I wanted to enjoy life.

But could I on an entry-level salary? What if something major came up? An accident? A medical expense?

Fortunately, I was able to get by without major incident. Pure luck. Like I said – I got away with murder.

Fast forward to today, I have a healthy 5-figure emergency fund, which is easily accessible. Losing my income is the last thing I worry about nowadays. 

I do not want you to go through this unnecessary risk. That is why in this article, I will show you:

  • The exact formula to find out if you already have an emergency fund
  • I will give you practical tips, including the ones I used, on how you can kick start an emergency fund
  • You will learn how to keep your emergency fund fully funded

What is an Emergency Fund?

Pretty self-explanatory – an Emergency Fund. It is money that you put on the side in case of unexpected situations that may arise. It is not “fun” money. It is not “want” money. It is strictly “need-based” money. Clear? Good!

The 3 major reasons you do not have an emergency fund

  • Living paycheck to paycheck. The truth is, the majority of you can find ways to get out of this cycle of misery.
  • Fear. Yes, fear. You are scared to sit down and take a deep-dive into your personal finances. You would rather walk around with a constant pit in your stomach knowing you might be screwed.
  • Excuses. You always have a reason why you are not able to do something. You have it justified in your head any which way possible.

So how much do you need in your emergency fund?

There is no set number that I can recommend for an emergency. However, below is a good rule of thumb to follow that apply to all.

(Current Monthly Expenses) x (3-6 Months) = Emergency Fund Target Amount

So, if your expenses are $1000/month, then you would need $3000-6000 saved.

How do you figure out your Current Monthly Expenses?

Take our a piece of paper, open a blank email draft, open notepad on your computer. Whatever.

Write down all of the bills that you paid last month. Cell phone bill. Your credit card. Rent. Utilities. Include debt as well like student loans, car payments, mortgage, etc.

Next to each item, write down how much you pay per month. It is okay to estimate, just estimate high.

Multiply the above number by 3, and then by 6. This is your range!

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Do you already have a emergency fund?

Simple. Just look at the above number that you calculated. Now, look in your bank account. Do you have that much? It is important to look in your bank account, and bank account only. Assets like a car value do not count. Your 401K does not count either.

Even if you have enough saved, you should still try to cushion it further. I personally have over 1 years worth of expenses saved. I could quit my job. Take a 3 month vacation. Then spend 9 months looking for a job. Never having to worry about paying bills or having money to spend. Freedom.

Where do you your emergency fund?

Whether you have an emergency fund or not, this money needs to be accessible quickly. That means putting it in an investment fund or a CD account will not work. Most people keep this money in a savings account. Some people even keep hard cash stashed in their home somewhere. While this works, I do not recommend it.

Don’t have enough money for your Emergency Fund? 

You need to set a goal and come up with a game plan to obtain the amount you need.

Only you will know how to reach your target number. Start by saving only one months worth of expenses. It’s a start. Then work on your second months worth. Keep going until you have at least 6 months worth of money. In other words, you should be able to survive for 6 months without an income using this money. 

Below are a few tips for inspiration. For me, I only needed did the first three points. I was able to reach my emergency fund target after that within 3 months.

Ways to kick start your emergency fund

  • Do you have a job that pays you through direct deposit? Adjust it. Go into your work HR system, and have a percentage of your salary sent directly to savings. When I started, I had 30% on my paycheck going directly into savings. The other 70%, I used to pay my bills.
  • Make a phone call. With one phone call, you may be able to get a better rate on your cable, cell phone, and internet bills. Tell them you are struggling and cannot afford the current rate. Tell them you are thinking of switching to another provider. Even if they are only able to get you 5% off your current bill, this money can add up over a year. And all it took was one phone call!
  • Look at your current expenses and see where you can cut down. For instance, look at your credit card bill. Where is all of that money going? Is the majority going to eating our and drinking? It sure was for me. If you do not make sacrifices, you will pay the price later.
  • Sell stuff you don’t need. Start by selling on Craigslist. If it does not sell, use eBay or Facebook. Remember to take good pictures and have a nice description.
  • Ask for more money at work. Are you making enough money at your day job? Do research on the average salary. If you see you are underpaid, formulate a plan to ask for more money. Do not just ask directly. Write down your accomplishments. Why you add value to your employer. Schedule a sit-down with your boss. Show your boss why you are worth $5k more per year.
  • Find a part-time gig. I mentioned earlier, you need to make sacrifices. Check out ride-sharing programs like Uber or Lyft. Look into a part-time job like delivering pizza, bartending. Browse through Craigslist. It is okay if you only do this until you reach your emergency fund target. Then quit.

What you should not do

  • Do not stop paying off toxic debt This includes your credit card bill, loans, and mortgages. If you stop paying these bills, your balance will balloon with the interest. Just don’t do it.
  • Do not overdraft your bank account. This should be obvious. You don’t have the money, so don’t act like you do.
  • Do not take a loan out. If you do not have an emergency fund, you will have find and save money regardless. Taking a loan out and paying back with interest is just stupid.

Once you have enough

I got pleasure and comfort with this newfound security. These habits become ingrained. It was exhilarating. So, I continued. Now, time is on your side. With time, you will earn more money at your day job. With time, you have the ability to save 7 months worth of an emergency fund. Then 8 months. Then a year.

Then the unexpected happens…

Boom.

That dreaded situation occurs. You need $10,000. And you need it yesterday.

For me, this luckily happened after I got my shit together.

In 2012, my old Toyota Camry decided smoke, then flame up on me. Everything under the hood was black. I can still remember the smell of charred metal. Simply put, the car was gone.

Because I had setup a healthy emergency fund, I bought myself a brand new Honda Accord. Buying a reliable car like a Honda was smart in my opinion. What was not smart, was buying it brand spanking new. This is a story for another time.

Hopefully, this happens to you after you’ve taken the steps above as well. If it does, you simply rinse and repeat the above steps. Continue growing your fund.

If not, you are shit out of luck.

Depending on what the situation is, you may have options. For instance, if it is a car accident and you owe money, you could work out a payment plan with the insurance company. If it is something where the money is needed immediately, you could ask family for some assistance. Pay them back.

Take everything in life as a learning experience.

In Conclusion

Remember. Each person is different. Each situation is different. There is no comparison between an unexpected flat tire vs. a major medical bill. However, the fact that your proactively taking initiative to set up your emergency fund can make a world of a difference!

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