In thIn this article I’ll explain emergency funds, talk about how much you should have in your emergency fund, and walk you through the steps I took to ultimately get out of debt and was able to quickly build an emergency savings fund.
What Is an Emergency Fund?
An emergency fund is a collection of cash and/or liquid assets set aside for emergency use only. A dead vehicle battery, unexpected medical expenditures, job loss, and house repairs are just a few examples of how an emergency fund might help.
Your monthly budget most likely covers the following items:
- Fixed recurring costs include rent, utilities, auto payments, and so on.
- Variable costs include groceries, dining out, shopping, and so on.
However, chances are your budget isn’t designed to absorb hundreds or even thousands of dollars in unexpected spending. The truth is that life occurs, and it’s best to be prepared.
How Much Money Should You Have In an Emergency Fund?
In general, most experts advise keeping at least $1,000 in an emergency fund. It is crucial to remember, however, that not everyone’s financial situation is the same. If you have children or other financial dependents (even pets! ), you may wish to increase your emergency fund beyond $1,000. Some financial experts in the media, such as Dave Ramsey, even go as far as to advise their audience to keep at least six months worth of living expenses in your emergency fund in case of a job loss or a longer illness.
If you work for yourself or on commission, you may wish to save more than the previously suggested minimum amount. These types of income are more volatile, so having a strong safety net is usually a smart idea.
How to Quickly Build an Emergency Savings Fund?
Now that you understand what an emergency fund is and what your target savings should be, let’s take a look at how you may go about creating your own emergency savings fund. In the next part, I’ll go over some general savings techniques to help you start an emergency fund as well as specific instances that worked for me.
Step One: Look For Methods to Save Money
Building an emergency fund is, at its foundation, nothing more than deliberate saving. The only difference between creating a savings account and saving for an emergency fund is that you’re creating the funds for one specific purpose: emergencies.
A budgeting calculator is a fantastic place to start when looking for methods to save money,
since it can assist you in the following ways:
By entering your income and spending, you’ll be able to see how much or how little wiggle space you have to work with. From there, you can choose where and how much you need to cut back – perhaps spending less on groceries is a smart idea for you, or perhaps restricting your online shopping is the best way to save money.
For some people this may mean finding a roommate. It goes without saying that living in some areas of the world can be quite pricey. Many average income earners have to spend more than 40 percent of their overall take-home pay on rent. If you’re familiar with the 50/30/20 ratio, this leaves less than 10% for the remainder of their necessities, which included automobile bills, utilities, petrol, and food from the grocery store. In such situations it can be good to give up a bit of your much appreciated solitude in order to alleviate some your financial stress.
Step Two: Reduce Your Take-Home Salary and Reallocate Your Resources
“Wait a minute, what?!?” “Do you want me to lower the amount of money I receive each month?” – The most terrifying revelation ever. Why would I put myself in a situation where I would have less money every month when I was already struggling to make ends meet?
Simple: I was overspending on non-essentials. I had the most expensive TV package, a regular online buying routine, DoorDash deliveries, and so on. Spending money was simple, it felt good (at the time), and convenience was essential.
To really buckle down and quit these spending habits, I HAD to lower my take-home salary in order to force myself into new habits. This was accomplished through investing in myself and my future. What may seem counter-intuitive at first turned out to be a very wise decision when looking back on it.
Here are a few instances of what I’ve done:
- Make sure that I was donating the appropriate amount to my 401K.
- I maximized my Employee Stock Purchase Plan.
- I automated a transfer of 20 percent of my savings to an account at a different bank than my checking account each month.
The first two are quite particular to my circumstance. Consider the following when deciding where to deposit your emergency fund savings: Savings, Budgeting, and options for debt payback. Here are a few ideas for getting started with your emergency savings:
- Make use of a standard savings account
- Open up a high-yield savings account
- Invest in assets that can easily be sold
Automating my money was another word I heard over and again but never really paid attention to. But it is brilliant and for anyone who is open and eager to hear it automating your savings is the ideal method to develop your savings without ever having to take any action on your own.
Now, I stated that the account must be at a separate bank than my normal every-day checking account. This was critical for my personal peace of mind that I would not begin moving money directly back into my bank account (been there, done that!).
Step Three: Commit to It
As I previously stated, there have been a few occasions when I have truly changed a deep-rooted behavior in my life, and a few times when I believed I had made the decision, but it did not stay. How can I mimic the first but not the second? I became uncompromising about it.
My principles were comprised of the following:
- It’s not a game.
- I’m not going to tolerate this kind of behavior any longer.
- I will not carry any credit card debt on a revolving basis (after I had paid it off).
Being stubborn about not spending money might be more rewarding than you realize. All you have to do is look at the received satisfaction in a different way. When I turned on my phone in the morning to start my online shopping routine, I would immediately think to myself “No way! Not today!” and put it down again. In those moments I sometimes surprised myself with the amount of willpower I could actually muster up.
I also shook up my morning ritual by journaling while drinking my coffee. This isn’t for everyone, and it didn’t remain with me long, but it was precisely what I needed at the moment.
And, of course, to make it easy on myself, I did a few things which would guarantee that I kept on track with this new behavior: I used a budgeting app to manage my spending and budgeting.
I check specific applications on my phone in the same order every time – FitBit, Instagram, and Facebook. I just threw Mint into the mix, so it was always on my thoughts.
Other suggestions to cut your expenses and stick to a budget include:
- Removing your credit card details from all online buying sites.
- Unsubscribing from newsletters and subscriptions that you don’t really use and therefore wouldn’t miss.
- Reducing wasteful spending.
- Decreasing the number of times you eat out.
There are several pieces of advice available on how to make not spending easier for yourself. But you’ll never accomplish things unless you abandon the drama and get determined about it.
While the actions I took may not be exactly applicable to your circumstance, the lesson is to be resourceful with what you have, educate yourself on how to use it, and why you may need to make yourself uncomfortable to achieve your objective.
Just because I got out of debt and started saving for an emergency fund does not imply that life gave me a pass and that large bills were never a part of it. My old car was clearly on its final legs and I had to make the difficult decision. When the time came, I am glad to say that I did not succumb to my newfound financial stability and take on a large monthly car loan payment.
I conducted a lot of research, prioritizing a car’s price and value over its luxury and brand name, and discovered a car that precisely met my needs without the huge brand name or monthly payment, which gave me another moment of tremendous joy.
Use the following steps to begin creating your personal emergency fund as you move toward greater financial security:
- Always be on the lookout for methods to save money:
- Find a roommate
- Buy secondhand
- Make use of coupons
- Sell your belongings
- Reduce your take-home earnings and reallocate your resources
- Maintain your focus
With those starter-tips in mind you’ll soon find yourself on the path to more financially stable future with less money problems and a new found appreciation for the small (and free) things in life.