Having an emergency fund makes your life better. It gives you peace of mind knowing that you have protected yourself from the chaos of life.
In the NFL, it is often said, that defense wins championships. Having months of expenses saved up for a rainy day is like having the 2000 Baltimore Ravens defense working for you. Your offense can be mediocre—like there's was—and you'll still win.
It is crucial to play great defense on the way to financial freedom. Without an adequate amount of money saved, you have to work your tail off to make ends meet. And when an emergency happens, you don't have a lot of options.
Often, folks turn to credit cards in these scenarios. Using credit cards for emergencies is like trying to put out a fire with gasoline. Your (money) problem hasn't gone away—and now it's growing.
What is an emergency fund?
An emergency fund is a pool of money set aside for the unexpected events life is sure to throw at you. It should be easily accessible but understood that this is not for vacations, Christmas, or that brand new iPhone that you have to have.
It's better to prepare than to repair...
Emergencies are bound to happen. In just the last few months, my wife and I have experienced a leaking roof, a flooded laundry room, a broken down car, and probably more that are slipping my mind. In all these situations, our emergency fund was there for us. We were able to focus on the fixes and not the funds.
When an emergency happens, the last thing your family needs is a stressed-out parent, spouse, sibling, etc. When you have an adequate emergency fund in place, you can worry about one thing. Taking care of the problem and getting back to business as usual in the quickest manner possible.
How much do you need?
The standard rule of thumb is three to six months of expenses. Elena and I keep about $15,000 in our emergency fund. For us, that equals about 6 months of expenses. We didn't do any real intricate math on this. We found a number we were comfortable with, and we kept saving towards it.
Anyways, find a number in the 3 to 6 months ballpark, agree on it, and move on.
How long will it take you to get there?
Building up an emergency fund of 3-6 months is no small task, so staying focused is essential. If it takes a year or more, then so be it. If you are 29 like me, I think you can spare 1.6% of your remaining life to reduce the amount of worry and stress for the next 60 or so years (You'll probably earn it back from lack of money stress).
TIP: To make it fun and to remain focused, make one of those goal tracking thermometer charts and pin it up on the fridge. Track your progress and reward yourself as you go—I suggest homemade banana pudding, cheap and delicious.
Now that you've got your sights set on a specific dollar amount, you should focus on your budget. Find the expenses you can reduce without significantly affecting your lifestyle. Maybe this means cooking more at home. If you can read, you can cook. Learn how. It is fun and you'll save money.
Don't forget to look at some of your recurring expenses too. Maybe it is time to re-evaluate car insurance prices or switch cell phone providers (my wife and I changed to MetroPCS, and it has been great, $60 of savings every month and the cell service is excellent).
Go through everything and see where you can increase your savings amount. Once you've done this and you know (roughly) how much you can save every month, divide your goal by your monthly amount and see how long it will take you.
For example, let's say you wanted a $10,000 emergency fund and you could save $750 per month towards this goal. If you had $1,000 in the bank already, then you will have your goal completed in 12 months.
I suggest knocking off a month just to be ambitious.
Once you know how much you need in total, how much you can save per month, and how long it will take you; write it down, and get after it. Your goal should look something like this.
Goal: Emergencies happen, and we are responsible for the well-being of our family, even in tough times (WHY). We will have a fully funded emergency fund of $10,000 by July 2020 (WHAT). We will save a minimum of $750/month (more when possible) to accomplish our goal (HOW).
I like to start with why you want to accomplish your goal. Your "why" will fuel you towards following through on the "how" so that you actually achieve the "what."
Now that you have a fully developed written goal for your emergency fund, all that is left to do is track your progress, celebrate victories, and don't allow defeats to knock you off the path.
Do you feel like you need help clarifying your goals and developing financial confidence so you can move forward towards financial freedom? Schedule a free planning call and let's get started.
Disclaimer: All written content on this site is for information purposes only. Opinions expressed herein are solely those of Forward Focus Financial Planning, LLC, unless otherwise specifically cited. Material presented is believed to be from reliable sources and no representations are made by our firm as to another parties’ informational accuracy or completeness. All information or ideas provided should be discussed in detail with an advisor, accountant or legal counsel prior to implementation.