This post should have been the first one I wrote. So much of personal finance is not only about being able to afford the life you want but being secure in the life you want.
The sad truth is that many of us are just one small accident away from going into debt. In fact, according to a CNBC survey done in January 2020, 41% of Americans couldn’t cover a $1,000 emergency. Don’t get me wrong, there is such a thing as good debt or debt that is working for you, but overall, debt means you couldn’t afford something and now someone else is going to make sure you pay them first. It’s your life, you should be paid first.
Why Should I Have an Emergency Fund?
There are lots of reasons to have an emergency fund. Maybe you have a medical emergency, or a storm tosses a tree into your car, or there’s a Worldwide pandemic and you lose your job. Really, anything is possible. Having an emergency fund is your insurance policy for your goals and dreams to not be derailed because of something out of your control.
How Much Should Be in an Emergency Fund?
3 to 6 Months of Expenses
There are a lot of different perspectives on how much you should have in your emergency fund. Opinions and ability are influenced by competing factors. For example, if you are a recent graduate, you might have another obligation of student loans. If you live at home, you might be saving more money, and meeting a savings goal for an emergency fund while paying off student loans is totally possible. You might be that same student, but this time, you’re braving the “real world” and you might have rent and utilities on top of our student loan making additional savings difficult.
One popular financial influencer, Dave Ramsay, says to start with a $1,000 emergency fund. I think just starting an emergency fund sets you on the right path, but let’s be honest, when it rains, it pours. Your $1,000 might not get you very far. 3-months worth of expenses is the average answer you will find, with it creeping up to six months to be more cautious. With what emergencies I have seen in my 31 years, I’m in the 6-month+ group.
How to Calculate Your Emergency Fund
Emergency funds are calculated from your monthly needed expenses. It is called an emergency fund because it will only cover emergency items like shelter, food, and transportation. It is not meant to cover vacations and splurges. If you want it to cover all of that, change your calculation to be based on total monthly expenses. This is why you need a budget! Grab this template I made to quickly categorize between needs and wants.
Monthly Needed Expenses X #of Months = Emergency Fund Goal
How to Start Saving For An Emergency Fund
The best way to start saving is to just start. Anything you can put aside is more than nothing. It’s a big goal, so don’t get discouraged, but it is one of the most important things you will save for so give it some priority. If you have other savings goals like a vacation or new TV, I would recommend you put those on hold to give your full attention to an emergency fund. You might also come across an emergency while you are still building your emergency fund. That is what it is for! Thank yourself for what you were able to put away for this emergency and keep on going. It’s not fun to think you can’t go on vacation or splurge on a new fall wardrobe right now, but when you have an emergency fund that saves you from having to cancel a trip or one that gives you peace of mind when your company goes through layoffs it’s going to be incredibly worth it.
If you want to learn more about how to not have expenses creep up on you, read this article about sinking funds.
