You never know when disaster will strike. The best thing you can do is be prepared. How can you prepare? By building an emergency fund that will be able to provide you with what you need in a time of crisis.
What is an Emergency Fund?
An emergency fund is exactly what it says. A pot of money set aside to be used in case of emergency. This emergency could be anything. Hot water machine goes and needs to be replaced. Roof is leaking and needs a repair. You lost your job and will need some time to find a new one.
Having the right preparation will prevent you from going further into debt in order to tackle an emergency. But there are many questions to answer. How much should you have saved? Where should it be saved? How can I save it? Let’s dig in!
How Much Should I Have in an Emergency Fund?
There are many thoughts on how much you should have saved in an emergency fund, but the general consensus is to have 3 to 6 months of living expenses which should provide you with the security you need in case of emergency.
You may be thinking, should I be building up an emergency fund or pay off my debt first? Good question. I decided to take on my student debt first but that was because I had the security of living with my parents. My $500 security net wasn’t going to cover much if something bad happened. It is up to you to decide the level of risk you are willing to take, but I would recommend saving at least 3 months of living expenses before beginning to tackle your debt, if it is of the low interest variety. That way, you have some cushion in case of emergency but won’t spend years trying to put away money into the fund. We will discuss high interest debt in the paragraphs ahead.
Where Should My Emergency Fund Be Saved?
Emergency funds are your rainy day fund. This is there to protect you if anything goes wrong. Therefore, you need to make sure it is there when you need it. What does that mean? Limit the risk with the money. No stock market. No real estate. You need to have access to the money as quick as possible when you need it.
If you have money in the stock market and things take a turn for the worse and you lose half of it. Then you lose your job. Now instead of 3 months, you only have a month and a half. That’s bad news. Avoid that scenario.
If your money is in real estate and you lose your job, then what? You have to sell your investment. That is not an easy nor a short process. Your money could be locked up for months before you get it. Worthless to you in a bind.
Do yourself a favor and keep your money in a high-yield savings account. That way you can earn some interest, however nominal it may be, and you know your money will be there for you when you need it. Sure, interest rates are at all time lows. But that money isn’t there to earn you more money. It is there for peace of mind. And that is invaluable.
How Can I Save Three Months of Expenses?
This is the hardest question to answer. If you are struggling financially and in debt up to your eyeballs, you may wonder how you could possible save 3 months of expenses. Good news. That is where myself and this blog come into play!
I have already outlined the process for you. Here are your steps:
- Change Your Mindset – The Debt Mindset
- Create Your Budget
- Live Within Your Means – Successful Budgeting: Living Within Your Means
By following those guides, you will have everything you need in order to be successful in your emergency fund building endeavors.
Looking to save some money? Check out these posts:
- Groceries – Save on Groceries: 10 Tips to Save Real Money Every Trip to the Store
- Utilities – How to Save on Your Electric Bill: 8 Tips to Save Money on Your Utilities
- Activities – Free Activities to Do – Ways to Save Money and Enjoy Life
Those guides will give you some tips and tricks to help you save money and give you the flexibility to grow your emergency fund.
High Interest Debt
Up above, we discussed whether paying off debt or growing an emergency fund is more important. When you have lower interest debt, the choice is easy. Emergency fund comes first, debt is second. But what about that high interest debt. That is when things get a little murkier.
High interest debt comes with high debt payments. That’s just the nature of the beast. These payments can be a total drag on your finances. They could severely limit your ability to save for an emergency fund. Especially if you are trying to save 3 months of expenses. So what are you to do?
The best thing you can do in that scenario is to get $1,000 – $2,000 saved up for emergencies, then give everything you’ve got to get rid of that high interest debt. Are you leaving yourself at risk with a low amount saved? Sure. But that small bit of money you do have saved will be able to pay for many emergencies that come your way. The risk of your high interest debt blowing up your budget is far higher than the risk of an emergency being over $2,000.
Action Items
So after reading this amazing advice, what are you going to do? Let’s get an action plan together:
- Step 1: Determine your monthly living expenses necessary to survive.
- Step 2: From there, determine how much you need in an emergency fund (at least 3 months, 6 months is preferred).
- Step 3: Start saving in a high-yield savings account.
- (Optional) Step 4: Pay off any high interest debt once savings is around $1,000 – $2,000.
- Step 5: Continue growing your emergency fund until you hit the number you desire
Once you are satisfied with your emergency fund, then what? Well my advice is to pay off all your debts as fast as possible. Bet you were surprised with that one coming from someone whose moniker is Dead Debt. If you had the extra money each month to contribute to an emergency fund, you will have that same extra income to contribute towards debt payoff.
Create that emergency fund then become debt free. Talk about improving your financial well-being. Once your become debt free, the possibilities are endless. Remember, when your debt dies, your life will rise!