What is an Emergency Fund and Why Do You Need One?
Uh-oh your car just broke down and the mechanic says its going to cost $1,000! This is when the rubber meets the road, can you just write a check for it? Or are you like most of Americans and would have to borrow money for the repairs? It’s a catch 22, you need your car to make money (generally) but you need money to fix your car…This is a problem a lot of good hardworking people face, some max out their credit cards for this, borrow from a family or friend, an some use a “predatory” short term loan!
An emergency fund because life happens, sometimes you need to fix something or help someone out in a pinch, or even to maintain your standard of living if you get laid off or some other reason your income might get lowered or vanish completely. Bills and life do not stop even if your income does.
One of the most important things you can focus on is to put together an emergency fund. This is a very liquid savings that you use only for emergencies. This means it’s usually held in cash in a savings account, not in precious metals or vehicle but cash that you can just go an withdraw for any reason at any time with little to no notice. An emergency fund should be about 6 months of expenses in size, depending on a few circumstances.
This can be tough for many people to accomplish because it takes a real commitment and dedication to amass such a savings. For many people this emergency fund will be $10-$20 thousand dollars, that’s no small pile of change. That is a real sum of money and it is hard to get there. However I have been without an emergency fund before and I know how to claw and climb my way up, have some very helpful advice for you on how to build up this emergency savings find.
How to Build A Large Emergency Fund
Start off Gently
Your emergency fund should aim to cover any possible problem that may happen in the future however, when starting off it’s best to start off small rather than put away too much money too soon. This can hurt you in the short term and that’s not what we are aiming to do.
What I did when I was starting off was I set up an automatic transfer of $25 a week to an account at a different bank. This was I didn’t see I had the money, it just felt like I was spending it.
Pro Tip: Make an account at a bank in a different but near-by city
It was very surprising to see after a short period of time just how much money was in there. That account quickly built up to be able to handle mid-sized emergencies such as a furnace giving up or a car breaking down. Saving $25 a week for a year is $1,300. Definitely not bad, especially if you stick this fund in a high yield savings account. These accounts give you decent interest on your money (for a zero risk investment) and your money begins to benefit from compound interest. Over time try and add more money every week to the account so it can grow faster.
$500 to$1500 is a great start for an emergency fund and will protect your from minor to moderate problems.
How Much Will You Need to be Set?
So now you officially have a decent chunk of change in your account, freaking fantastic! You are much better off than most people in the country and your family has some serious peace of mind. However there is still work to be done here. Odds are that if you find yourself in a real emergency such as a layoff, destructive weather or being unable to work then $500 to $1,500 probably wont be enough to keep you afloat. This is what you are really saving for, these things do happen.
I remember back after I had started getting my feet back on the ground. I got a job at the local utility company working on their gas infrastructure. It was a decent job, I was getting paid $18/hr with 10-20 hours of overtime a week. However I ended up crashing on my dual sport dirt bike (street legal dirt bike) and I fractured my finger. I ended up being out of work for 6 weeks with no pay. Not to mention the medical care I needed to pay for, this was not what I wanted to happen. Luckily over the last 8 months that I had gotten my job I made sure to build up an emergency fund of $9,200 which was about 3.5 months of total expenses (rent, bills, eating out, etc).
While it did suck watching my account go down over the month and a half I was off it was very nice knowing that I was not in danger of losing my apartment or falling behind on my bills. This way I could let my finger heal properly without trying to just work through it which would probably have made it worse and make it much harder to work years down the road. Having an emergency find is very important, and more so if you have kids to support.
Your emergency fund can vary depending on your situation, for instance right now I keep less than a month emergency fund – just $1,500. Why? Because I have build up a very strong credit score currently at 813, which means I have a considerable line of immediate credit. So if I’m off work I can put everything I need on a credit card while I wait to pull the money from one of my less liquid asset accounts. Such as betterment or my bitcoin wallet.
So if you have good credit you can use your credit card in a pinch for immediate liquidity and use your emergency fund to earn interest. So depending on your credit score you can have a smaller emergency find if you have a lower credit score then you should aim for 6 months of expenses as an emergency fund.
Lower or Eliminate Your Debt Will Help Your Emergency Fund Grow (And Lower it)
If you follow this site then you know I am not a fan on debt. When you take on debt – of any amount. You enslaved a time in the future when you must work to pay that off for something you want now. Which is bad, but what is worse is debt makes your monthly expenses higher and makes it harder to grow an emergency fund.
I’d highly recommend reducing whatever debts you can as fast as you can. Make sure to read on how to get rid of your debt fast,
Getting out of debt will help you maximize your ability to fund the emergency fund, this will drastically speed up the rate at which you build it up to something that can protect you and also re-fund it again after you draw from it.
Most people don’t realize how important an emergency fund really is until they’re faced with a real emergency. Putting in the time and effort to build an adequate emergency fund is a simple way to make sure you and your family have security. Start building this now, even $ or $10 a month will help, you can’t predict when something will go wrong only taking action to day will mitigate it.
Make sure you start setting that up ASAP, if this helped you feel free to comment or shoot me an email, I’m always available to you.