Imagine having the peace of mind that you will be o.k. financially no matter what happens in your life: if your job were to disappear today, if your car broke down and you needed an expensive repair, if you had a medical emergency or needed costly dental work.
Are you financially prepared today to handle one of these life events?
Most people (~78% according to this CareerBuilder survey) are just getting by month to month—thankful for each paycheck when it comes and anxiously awaiting the next, while hoping that nothing goes wrong in between. Are you in this boat?
There is no shame in this, but there IS a lot of stress.
We all intellectually understand that life happens—whether we are prepared for it or not. We can have a health scare or our company might restructure. And when we’re worried about how we’ll be able to pay rent, in addition to these already challenging moments, the stress can feel unbearable. The overwhelm is real.
Emotionally and behaviorally, however, we conveniently push this to the back of our mind and assume that nothing like that will happen to us.Until it does.
While we’ll never be able to prepare for everything that can possibly come our way in life, we can prepare ourselves financially to weather these moments a little easier. You don’t want to lay awake in bed at night panicking about you’ll pay rent and bills when your company does layoffs or if you have a major car repair.
The good thing is that ANYONE can get this peace of mind. It’s possible for you if you just know how.
One of the most important things you can do for yourself in life is to give yourself the peace of mind of having an emergency (or rainy day) fund.
“An emergency fund is an account for funds set aside in case of a personal financial dilemma, such as the loss of a job, a debilitating illness or a major repair to your home.”
This answer is different for everyone, but there are some general guidelines you can follow.
Many advisors recommend anywhere from 3 to 6 months of living expenses, with some who recommend up to 12 months! This is a pretty big range, so you’ll need to think about your personal situation. If you are not responsible for any other human being financially, knowing you can cover 3-6 months of expenses, no matter what happens in life, might feel comfortable to you.
Stop. Breathe. Are you thinking “I can’t possibly do this right now. I’ll build an emergency fund when I have more money. I just don’t have enough to save right now on top of my living expenses.”
Mmmmm hmmmm….. You and almost everyone else.
This is not just some pie-in-the-sky nice budgeting theory for “people that have more money than you”. This is for YOU.
It doesn’t matter if you have a high-paying corporate job or a just-covering-my-bills-right-now job, you can and do have the ability (and the responsibility to yourself) to protect yourself from life’s hiccups.
This might seem impossible right now, but I am here to tell you it’s not.
There was a time in my life when I had been working 12+ hour days, 7 days a week as an independent contractor and was constantly in fear of a client not paying or not getting a new contract. It was stressful, to say the least. I truly counted on nothing going wrong in life, because if it did, well… I just don’t know how I would have covered all my bills.
I am lucky I survived that period without a major car repair, but it was not something I’d ever like to experience again. It changed me as a person. I was constantly stressed out, and that affected my personal relationships and how I lived day-to-day. I was not fun to be around. Inside, I was on edge. All. The. Time.
Zooming back to today, last month I had 3 costly car repairs in one month—one each week for three weeks in a row (when it rains it pours). While it hurt (a lot!) to pay those repair bills, I knew I COULD pay them without racking up my credit card. Because I had taken the time to build an emergency fund, a bad situation did not become worse.
If 3-6 months of savings feels impossible to you, trust me, I have been there. I felt that exact same way when I was scraping by with no savings to fall back on.
I found that with a few small changes, I was able to build an emergency fund that gives me peace of mind every day. I am here to tell you that it’s possible, and it’s worth it.
Yes, this feels like a lot of money.
Not, it is not out of reach for you–no matter where you are on your financial journey.
5 Steps to Build Your Emergency Fund
Make A Decision and Commit to Yourself
Building an emergency fund doesn’t happen overnight. You will need to decide that it’s important to you and why. Are you seeking peace of mind? Do you want to feel financially independent? Are you looking to reduce stress and improve the overall quality of life?
Get crystal clear on WHY this is important to you and write this down. Put it in a place that you will see every day.
The more you remind yourself of your goal and why it’s important, the more likely you are to reach it.
Every day you will have to make the choice between spending your money on something else or spending it on having the peace of mind that comes from having an emergency fund in place.
Determine Your Target Emergency Fund Amount
Sit down a take a quiet moment to reflect for yourself. Be honest. If a major crisis came into your life right now, would knowing that you had 3 months of living expenses paid for help you feel mentally prepared to tackle any challenge? Or would a 6-month window give you greater peace of mind? Or another time frame?
As you reflect, here are some questions to ask yourself:
Am I in a niche career/position that has limited job opportunities if I were to need to look for a new position?
Are there any big expenses I could immediately cut if I had to? Cable? Subscriptions?
Am I prepared to think about selling things of value to bring in money if I had to?
Am I financially responsible for other people? Once you have a number of months that feels good in your heart, you’ll need to calculate your monthly expenses to know how much you need to live each month.
If you’ve never tracked your expenses before, you may have no idea what it costs you to live every month.
If you find yourself in that spot, multiply your monthly after-tax income by .85, and make that your target. You can always adjust later, but this will give you a starting point. Financial gurus, and conventional wisdom, tell us we should be saving 15% of our income each month, so this 85% target is also good because it trains your brain to live within your means instead of spending ‘til you can’t spend no mo’ every month.
Emergency Fund = (# of months savings you desire) * (monthly expenses)
Caveat: If you have debt (car, credit cards, loans), start with a default $1,000 emergency fund goal. Then tackle paying off that debt before returning to build a 3-6 month emergency fund.
Find the Money to Make Your Savings a Reality
If you feel like you’re just getting by every month, you may wonder where in the h#&! you are going to “find” money to save.
It’s there. I promise. You just need to know where to look.
You will need to be completely honest with yourself about your finances. Look at what you are currently spending money on, and determine if that happy hour or new sofa pillows are worth more than the peace of mind that you will get from having an emergency fund in place. In short, you will need to create a budget.
I’m guessing you knew we would come to this point sooner or later. Budgeting is not particularly sexy. It’s not fun for many of us. But it is empowering.
As a driven, focused person, I am embarrassed to admit that I have absolutely ZERO willpower in certain ares of my life… like chocolate. If it’s around me, I will eat it. To justify buying my favorite sweet treat, I tell myself that I will only have a bite each day and that it will last. Yea, that’s not happening. I’ve long learned that it’s more effective for me to not have chocolate in my possession instead of trying valiantly to fight my own impulses.
The same thing holds true when I started to build my emergency fund. My first go at trying to build it up was like running in circles. I would build a little savings, and then a not-so-emergency “emergency” would come up. I’d really need to get that new pair of running shoes. Or at least that’s what I’d tell myself (and honestly believe). Or I’d duck into Target to buy some toilet paper and walk out with that plus a sweater and lip gloss because they were on sale. “Just this one purchase,” I’d justify to myself, time after time. Not surprisingly, my emergency fund did not grow as I had hoped.
What I learned from this was that I need to make it easier on myself and remove temptation completely. Basically I feel like I need to treat myself like a child.
I opened a savings account at a separate bank from my existing checking/savings accounts. I looked for a free account (no monthly maintenance fees) that had the highest Interest Rate I could find. The Capital One 360 Money Market Account was the best account for me at the time.
Note: Money market accounts will often yield higher APRs than savings accounts, and are good for long-term savings goals.
I contacted my HR department to update my direct deposit so that 15% of every paycheck would go to this separate account without me ever seeing it. The remainder went to my main checking account.
This did two things for me: First, it made saving so easy because I didn’t even have to think about it. I didn’t have to calculate what portion of my checking/savings account was reserved for this. I didn’t have to remember to put money away each month. I, literally, didn’t even see the savings build. It just happened.
Second, because this account is at a separate bank from all my other accounts, I don’t see it. I know it’s there at the back of my mind, but it’s not just sitting and screaming “spend me if you need” when I log into my main checking to pay bills or check my balance.
This step was the most important one along the way in helping protect my money from….well, me.
Speed up your savings: Put every extra dollar
Once you get your savings rolling, it can be rather addicting. Watching your emergency fund increase each month can really light a fire under you to make it want to grow more–and faster!
This is the time to start thinking about doubling down on tightening your budget and finding extra ways you can save a few more dollars every month. Can you live without that pumpkin spice latte? Can you avert your eyes as you walk through the “dollar deals” section in Target? Or better yet, can you avoid Target altogether?
Can you put in a few more hours at work or pick up a side hustle?
It’s amazing how creative when we are motivated. Let your creative juices flow!
It’s time for you to get started and take these steps to build your own emergency fund. Visualize and let yourself feel the freedom you will feel knowing you are going to be o.k. financially no matter what.
