Consider this: You walk into work tomorrow and your boss calls you into the office. There has risen a need for layoffs in the organization and unfortunately you are one of them.
Been there before? Or heard of people who have?
It’d suck, wouldn’t it? Not being able to afford what you need…right NOW?
It doesn’t have to be this way!
As we work to build a solid financial life there are a few items that must come first. And they may seem obvious, but I have to admit I know more than a few people who don’t participate in these.
The first and most important of these is called saving. It’s basic. It’s simple. It’s easy. But it does take some conscientious effort.
And more important than saving for vacation or a new laptop or TV (of course we’ll discuss those later) is saving for emergencies.
This is where the Emergency Fund comes in. Haven’t heard the term before? Maybe you could check out Dave Ramsey or a number of other personal finance bloggers! The Emergency Fund is the first thing you need to build up! Haven’t started? Today’s the day!
Most people take this view of Emergency Funds….
It’s a savings account set aside for, well, emergencies. Such as immediate car repair needs, immediate medical attention, immediate repairs on the house, etc., etc.
I tend to take a different view on them…(sue me. 😉
It’s a savings account set aside for use if I lose my job or end up on extended leave-without-pay and can’t pay the bills and feed myself.
(Maybe my view is a little extreme, but I think emergencies like car repairs, etc. can actually be foreseen to a certain extent. My car is 13 years old now, and I KNOW my car is going to need something done to it. I have a different savings fund for these called my “cash savings.”)
So how much should be in the Emergency (AKA: I-Don’t-Have-A-Source-Of-Income-But-Am-Looking-For-One) Fund?
Most professionals suggest 6-8 months of living expenses.
Sounds like a lot, huh? It is. But it’s better than not having any and being put out on the streets or having to move back in with your parents. 😉 Plus, you’ll just start “feeling” wealthier with that sitting in an account somewhere (making dividends of course) with your name on it. Hopefully you’ll never have to use it!
Right now, I am definitely still working towards this. In the meantime it also serves as my “cash savings” (for repairs and other emergencies that don‘t include me losing my job =) but once I get it built up to 6-8 months living expenses I will start another fund that would cover any minor emergencies.
So how do we even start building up an emergency fund?
I suggest “paying yourself” first (this takes a budget.) When you get your paycheck or see the direct deposit in your account, the day you receive it, put a certain amount (or percentage) into your Emergency Fund. How much is up to you. Maybe it’s 10% (shoot at a minimum for this) or 25% or maybe you can put even more back if your bills will allow. But put SOMETHING back.
I have been putting back around 20% of my paychecks into my emergency fund, and it’s refreshing to know I have something to fall back on if something were to happen.
Of course there will be other things we want to save up for before we hit the 6-8 month living expense mark in our E-Fund, so I think it’s safe to say once you have $1,000 in your E-Fund you can start to split up your savings to other things as well. Just don’t forget about your little E-Fund. He wants to grow and the long-term goal is to get it up to that point it will cover 8 months of your living expenses if needed. =)
What do you guys think? Agree or disagree? Do you have an emergency fund or are you building one? What keeps you motivated and do you have any cool tools you use to save?