There is nothing that can derail your financial progress than an emergency. You’re thinking your doing okay with paying off your debt or saving towards retirement and then you are hit by a costly emergency. If you do not have an emergency fund, then where is the money going to come from?
What is an Emergency Fund
An emergency fund is simple a stash of cash that you’ve saved up for the sole purpose of helping you to maintain your normal life when an emergency happens. It’s not a stash of cash to use when you are short in your budget for groceries or for entertainment purposes. It’s strictly for emergencies that may arise.
So what would you classify an emergency? An emergency is when a home appliance breaks and you need to replace it, when you or your significant are laid off from work, car repair bills you didn’t expect, or a high-deductible from a medical bill.
There are two different types of emergency funds: a baby fund, which is a low-amount emergency fund, and a larger emergency fund which contains 3-6 months of living expenses.
A baby fund usually has roughly around $1,000. You can use that for emergency that may arise, but remember you will have to add the fund back to the account. A larger emergency fund which contains your 3-6 months of living expenses depends on how much your expenses are. You will have to calculate that and save accordingly.
10 Ways to Build an Emergency Fund
1.) Break it Down – How much is your emergency fund going to be? If you are brand new to building an emergency fund, you should start with a baby emergency fund of $1,000. Once you hit the $1,000 mark you can start to focus on the bigger one, 3-6 months of expenses.
2.) Set an Initial Goal – If you haven’t started to build your $1,000 emergency fund, then start with that. It’s easy to obtain once you set your mind to it. You may not have $1,000 sitting around ready to be applied to your baby fund. So let’s start with an initial goal of a specific amount each week, like $25. The investment of $25 a week leads to $200 a month. We are starting to see progress now.
3.) Make it Automatic – Stressing about how to set a specific amount aside each week to fund your emergency fund? Have your bank set it up to automatically deduct the specific amount you agree on. If you never see it, you will not miss it. We didn’t and once the baby fund was funded, I was shocked how quickly it took.
4.) See Where You Can Reduce – Do you ever have extra money leftover in your budget categories, then apply it to your emergency fund. Anywhere you can try to reduce in your budget categories, the extra money you can put towards to your emergency fund. Call around to receive low offers from car insurance, cable – if you have it, etc.
5.) Stop Eating Out – Believe me, I get it. I really do! When life gets hectic sometimes eating out seems like the right path. Fast food, quick meals out is relatively cheap, right? Wrong, my friend! All of those fast and quick meals can add up fairly quickly. Save money on making those same meals you love to enjoy out at home for a fraction of the cost. Add the extra money to your emergency fund.
6.) Grab a Second or Part-Time Job – Struggling to add to your emergency fund? Then try to obtain a second job. Everything you would earn from your second job can be put towards your goal. It doesn’t have toobe many hours a week, just a couple. Mowing grass during the spring is summer doesn’t take too much time and you can quickly bring in any extra cash.
7.) Host a Yard or Garage Sale – Chances are if you found yourself in a financial crisis, you may have bought more than a few things you either do not need or no longer need. Will you sell the items for the amount you paid when you first purchased those items.
8.) Treat It as a Bill – For others it can be hard to set money aside if it’s not a bill. It is too easy to blow through the money if you know you have it. So start to treat any money you put towards your emergency fund like a bill. It NEEDS to be paid every month, weekly, however you may see it. Most people want to get their bills paid, so that same principle will apply to the money you put towards your emergency fund. You may want to pick a date every week, every two weeks, or even every month. Pick which method works for you and your family.
9.) Celebrate with a Milestone – Earlier we discussed setting an initial goal. The first goal may be reaching $200, or even $500. We as humans, love to be praised if we accomplish things. Why not treat yourself to a great book or one coffee out? Now that doesn’t mean treating yourself every month, just everything you reach a certain milestone.
10.) Aim Higher – Once you reach your baby fund of $1,000 then start to look at the bigger picture. Start saving towards one month of expenses, then two months, then three, and so on. If you are following Dave Ramsey, he suggests saving at least 3-6 months worth of expenses.