HOW TO CREATE FINANCIAL SECURITY – THE EMERGENCY FUND
Life happens.
When Things Don’t Go According To Plan
Have you ever come home after a long, hard work day and just wanted to kick your feet up? Maybe it was the middle of the summer and for whatever reason you were just feeling stuffy in your work clothes all day. Now you’re ready to slip into a t-shirt and cool off on your sofa.
But, when you open the door to your home, instead of a welcoming breeze of cool air, you walk into a wall of heat. The AC unit is down. And worse still, the repair man tells you it’s REALLY down. For good.
Sometimes it’s the AC unit. Sometimes it’s the fridge. It may be medical bills. Or worst of all, maybe it’s the complete loss of income. Regardless, one thing is for sure. Life happens.
What Is An Emergency Fund?
Once you’ve accepted the fact that life is going to throw some surprises at you at some point, the obvious question is, “How can I be ready?” Enter the emergency fund.
An emergency fund is the last line of financial defense between you and crisis.
Generally speaking, it’s a pile of money you have stashed away that could cover all your expenses for a certain amount of time. Obviously, the more you have, the longer you can avoid a crisis.
For my wife and I, that time period is six months. Despite the fact that we have very stable jobs, we opted for this higher amount for the simple fact that we enjoy the security it brings.
If you also enjoy a stable job and can stand a little more risk, maybe you’d prefer to build a three-month emergency fund. This is a decision you (and your partner if applicable) should make together. Be sure to take into account the cost of living where you are, the stability of your jobs, and how quickly you could replace your income should you lose it.
Once funded, your emergency fund is only for (you guessed it) emergencies.
Seriously. Live as if it’s not there. Cash flow large expenses you know are coming through sinking funds built into your budget. Save this for only the worst of situations.
What An Emergency Fund Isn’t
I want to be very clear on the point I just made: your emergency fund is not for upcoming expenses that you are aware of.
Going on vacation is not an emergency. If you get invited at the last minute, don’t have the money saved, and can’t make it happen in your budget, stay home. Do not turn to your emergency fund. The ocean will be there next year, but your income could vanish tomorrow.
I really am a very optimistic person. Probably overly optimistic if you asked my wife (who is much more realistic). But, when it comes to your emergency fund, you need to assume that the worst is coming. This is the moat between whatever form it takes and your castle.
How To Build Your Emergency Fund
As you might imagine, building up this amount of money takes time. You can minimize this time by doing a few things.
Trim your budget down to nothing. Go to work, eat, and sleep. And when you eat, eat groceries.
Look for extra income sources. When you’re looking, don’t get ideas of grandeur. This is not the time to go entrepreneur. This is time to bring in guaranteed money for work. Here’s a list of ideas that I know will work from firsthand experience – Click Here.
And, crazy as it sounds, pause your investing. I preach about compound interest regularly on this site, but the bottom line is that it’s better to be safe than sorry when it comes to a financial crisis. Nothing will hurt your retirement more than cashing it out early in an emergency because you didn’t have anything else in place to weather the storm. You’ll be back shortly if you stay aggressive.
Where To Keep Your Emergency Fund
I didn’t mention this previously, but there is one more thing your emergency fund isn’t: an investment.
Keep your emergency fund liquid. You need to be able to access it at a moment’s notice.
I know that’s a painful thought for some of us. I sure wish that giant chunk of money had been in some good investments this past year as the stock market climbed, but there’s no certainty that it will continue. A little unrest could see your emergency fund go from six month’s expenses to three month’s expenses overnight if it’s invested in the wrong things at the wrong time.
Don’t expose yourself to that risk. Don’t get creative. Open a savings account, put the money in it, and forget it. Shop around for a savings account with a decent interest rate if you want to, but don’t get carried away. Just remember, this is about protection.
Be Prepared
So, in conclusion, protect yourself and your family from financial risk. Take some time off from your other financial goals and focus fully on building your emergency fund so that when you get back to your other goals, you can accomplish them with some real financial security.
And as always, regardless of your money goals, you can “Bank on a Budget” to get you from where you are to where you want to be!
When it comes to your emergency fund, you need to assume that the worst is coming. This is the moat between whatever form it takes and your castle.
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How many months of expenses would you like to have stashed away for an emergency? Why that number? Share your considerations with us as we make this important decision.
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