If the current COVID-19 situation has taught us anything about ourselves, it’s that many of us didn’t have enough of an emergency fund. We always knew in our minds that we should have one. It was always easy, though, to justify delaying building up our funds in exchange for something we wanted more. It’s time we build up this crucial emergency fund, especially in this far from the norm world.
What is an emergency fund? It’s money set aside for emergencies, which are events that you did not plan for. It could be a car accident, a medical emergency, a job loss, and many more. Financial gurus suggest anything from a 3-month to 12-month emergency fund. What this means is figuring out how much you spend during one month, then multiplying that number by the number of months you want to be protected. That is your savings goal.
I know from my own experience how hard it can be to look at your monthly income and expenses for extra money to set aside. Just like with establishing routines or budgets, it’s all about starting small and working your way up.
Start with a 1-month emergency fund
Here are the basic steps to building your emergency fund:
- Determine your emergency fund goal
- Decide how much to set aside every month
- Calculate how long it will take to reach your goal
- Re-evaluate your expenses and savings amount based on Step 3
- Save every month
- Celebrate when you reach your goal!
Let’s start with the smallest step we can take forward, a 1-month emergency fund. The first thing we need to know is how much you spend in one month. Look back on the last full month and add up all of your expenses. Be honest with yourself. If you try to fudge the numbers and undercount yourself, you’ll be in trouble later. The 12-month fund you thought you had might only be 9-months worth, for example. If anything, it’s a great way to see how much you’re spending in a month. If you’re spending more than you earn, that’s a story for another time, but you can figure out your spending patterns better by making a budget.
Now that you know your total monthly expense, write that number down as your base number. Right now we’re going to focus on 1 x your base number. The next step is to figure out how much to set aside every month. If you had any money left over from the previous month, you could use up to this amount as your goal. For example, you have $300 left after all of your income and expenses at the end of the month. Then you can choose to save $10, $90, or even $300 every month towards your 1-month emergency fund. It’s your choice, but be aware that the less you put in, the longer it will take.
This is how long it will take to get to your 1-month emergency fund:
emergency fund goal ÷ monthly savings = number of months
So if your base number is $3,000 and your monthly savings is $150, it will take 3,000 ÷ 150 = 20 months. You might be looking at that number and thinking that it’s kind of crazy that it will take almost two years to save up one month’s worth of expenses. If that’s the case, you can do a self-evaluation and decide what you value more. Would you want to feel more secure with a financial safety net, or do you want to continue your spending habits or keep the same income you have now?
You can continue with this plan for now, but to improve your timing, you’ll want to study your expenses and see what you can pare down. You may not be eating out as much or going out shopping. Maybe you don’t really need those few items you just put into your Amazon cart. Instead of buying a drink from a coffee shop, learn how to make it at home. I’ve been making iced chai teas at home by using this electric milk frother, and I love how easy and convenient it is.
You can also work on increasing your income. Even in tough economic times, it never hurts to try. It is better to have attempted to talk to your employer or to pick up a side job than not try at all. Your goal is to create your safety net for yourself and your family.
Celebrate when you get to your 1-month emergency fund goal! You have just proved to yourself that you can save for yourself, and you’ll be able to do it again. Your new goal is now 2 x your base number, or a 2-month emergency fund. Just repeat the steps, increasing your goal amount by one month at a time, and you’ll be on your way to a 12-month emergency fund. A 12-month emergency fund is your ultimate goal to provide the best security and peace of mind in times of any trouble. This article from Monster.com shows that the average job hunt takes about five months.
Where to save your emergency fund
Where should you be saving this emergency fund? Think about the purpose of this fund. You want to be able to access it immediately when you need to. You need it to be as risk-free as possible since you never want the amount to go down on its own. A simple savings account at your bank is your best solution.
You don’t need to worry about interest rates for your savings account. You’re not trying to make money out of this account. On the other hand, once you get to your 12-month emergency fund goal, you don’t need to add any more money. You can focus instead on your retirement funds and other debt you may have.
Tools to help build your emergency fund
Budget applications like Mint.com and YNAB (my affiliate link) can help plan your emergency fund. You can set a savings goal in either app. YNAB will automatically calculate how long it will take based on your monthly savings amount. It will even update if you fall behind or increase your contribution in a particular month.
If you use a bullet journal, there are several savings spreads you can use to see your savings visually. Here are several that I’ve found:
Start saving for your emergency fund
It may seem daunting to imagine saving enough money for a year of expenses, but if you follow my method of starting small, you’ll accomplish the most crucial step: getting started. A lot of times, we get hung up on the process without trying to start, which further delays our action. By starting with one month as your goal and making it a priority, you’ll be surprised at how much you’ll be able to save. Even if it takes more than a year, that time is trivial compared to the rest of your lifetime. It’ll be worth it to know that you’ll have one less thing to worry about in that future lifetime.
Money is a guarantee that we may have what we want in the future. Though we need nothing at the moment it insures the possibility of satisfying a new desire when it arises.
Aristotle
You can start your path towards financial stability and security by setting up your emergency fund. Whether you’re saving a few dollars a month or a few hundred, you’ll learn more about yourself and what you value. An emergency fund is your lifeline in times of trouble. We all need one, and we can all get there.
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