There are some things in life you just need to suck up and take care of. Having an emergency fund is one of those things. But it’s not all that bad. Yes, getting started and getting to that first goal mark is the worst. The actual worst. But being able to rely on an emergency fund instead of a credit card is the best feeling.
What constitutes an emergency?
- An unplanned car repair
- No not an oil change, plan for that shit. You need new car tires every 50ish thousand miles, plan for that shit. But if you get a nail unexpectedly in your tire or your water pump cracks, that’s an expense I’ll dip into my emergency fund for.
- An unexpected medical bill
- Trip to urgent care or the ER? Yes. But if you know you’re bound to go to the doctor at least once a year because you’re an adult that still gets ear infections like a 7-year-old (yes, that’s me), plan for that shit too.
- Deductible on your auto insurance because you rear ended someone at a yield (yeah, that was me too)
- You loose your job and need money to cover your essential expenses until you find a new one.
Know the difference between recurring expenses (as big of a pain in the ass as they may be) and a true emergency. You can plan for non-monthly recurring expenses buy building a safety net into your budget, and if you can plan for something then it’s not an emergency.
What should your goal dollar amount be?
If you’re just starting out:
- Enough to cover the deductible on your auto insurance and health insurance
- Say $500 for the auto insurance deductible and $1750 for the health insurance deductible; that’s a goal of $2250.
- 2 to 3 months of your bare bones budget
Longer-term emergency savings goal:
- 6 to 12 months of your bare bones budget
Start small. Hit that first smaller goal and the momentum will build from there. The common 3 to 6 months of living expenses recommendation is a great goal to have, but it’s going to take time to get there. This is what is so hard about building an emergency savings – we don’t see immediate gratification. But if you can set smaller goals that lead up to your larger one, it makes the process more manageable.
Remember, the goal dollar amount will vary from person to person. Some people are more conservative and like to have a bigger cash reserve. People have different responsibilities; $5,000 can be a lot for a single 25-year-old renting an apartment vs a 30-year-old that owns their own home.
How do you get to that dollar amount?
Build it into your budget bebe.
But okay, this really depends on what else you have going on. This should be your first financial priority until you hit at least $1,000 – this dollar amount should cover most smaller emergencies (plus, this is probably what Dave Ramsay recommends and what he says goes ?). What do I mean by making it your top priority? I mean: do what it takes until you hit this number.
- Do a spending freeze
- Only pay the minimums on your debts
- Analyze your spending to see where you can temporarily cut expenses
- Sell a kidney
Once you hit $1,000, first go out celebrate (BECAUSE HITTING YOUR GOALS IS AWESOME) and then move on to your next goal and keep chugging.
From here we can slow down a bit. Figure out what you want your next dollar amount to be and come up with a plan. Figure out what you can realistically put away on a monthly basis and determine the time frame. If you decide you want to go from $1,000 to $5,000, understand that this may take some time if you can only put a smaller dollar amount away each month. But the point isn’t how much you can do, it’s that you’re doing it.
Do I really need to tell you where to stash the cash?
In a high-yield savings account that’s relatively liquid. If you have a tendency to dip into the fund for non-emergencies, then consider keeping the account at a different financial institution. You want it to be easily accessible but not too easy if you lack self-control.
Keep these funds separate from other savings accounts that you may have. Exhibit A:
Ally Bank is cool and lets me nickname my accounts. I like to put the goal dollar amount in as a reminder and a motivator.
A final reminder: Keep in mind that 6-months’ worth of living expenses is going to look at a lot different at 25 vs 35. As we get older, our responsibilities change (i.e. house, kids, etc.). It’s not a bad idea to revisit that dollar amount each year and continue to contribute as time goes on.
Carolyn Rowland is a CERTIFIED FINANCIAL PLANNER™ passionate about empowering individuals to take control of their financial landscape. “We often tend to place our own priorities on the back burner for others, resulting in sacrifices we don’t often realize we’re making.”Carolyn believes in taking a values-based approach to financial planning. “Together we’ll define what matters most to you, what you want your life to look like, and develop a plan that fits your lifestyle.”
Carolyn Rowland is in the Milwaukee WI, area.