Once you reach a certain point in your financial life it’s time to start thinking seriously about building up that emergency fund. While it doesn’t make much sense to have a pile of money in a savings account while you have debt, once the debt is gone? What do you do with the pile of money that’s leftover? (Well, ideally of course you’ll have a little wiggle room, there are very few that will have an actual pile of money left over every month)
Here, I assume you’ve already dealt with your debt and have paid off all your consumer debt except the house. I’m also assuming that you want to continue the awesome progress you’ve made so here’s a plan to keep going and to grow toward financial independence.
The first step
Since you’ve dealt with what are usually the largest cashhogs in the average budget; payments on STUFF, you should be able to continue making those payments that you were making towards debt, but instead putting them towards building a healthy emergency fund. You’re not doing anything different, you might still feel a little broke or you might not notice it at all. The point here is trying to avoid lifestyle inflation, don’t get accustomed to having more spare cash on hand, save it instead.
Spare yourself the headache and just pretend you still have payments to make, only now you’re making the payments to yourself. It’s much easier to keep with your current budget than to have to get used to cutting into the budget once you start spending that cash. Put your former debtpayments straight into an easy to get to, very liquid account such as an online savings account with banks such as Ally and ING Direct.
But how much do you actually need?
Ignore what everybody else thinks is a good amount for you to have in your emergency fund. It doesn’t matter what anyone else think or what experts say. What matters is that 1. you have an emergency fund and 2. that your emergency fund can tide you for the period of time you think you will need it. Thinking you might lose your job? How long will it take to find a new job? Of course it’s hard to say exactly but you should have a good idea of the minimum amount of cash you need. YOU and your situation are unique and only you can decide how much money should be in your emergency fund. Some people are fine with half a year’s worth expenses in it, others strive for a nice round number like $10,000. Some others (like me!) won’t be fully satisfied until their emergency fund covers a year or hey, two years of expenses. It’s your peace of mind, how much peace of mind do you need?
Don’t touch it! Emergency funds are not for spending! They are for putting food on the table when its needed, for fixing your car or your furnace when they blow up. An emergency fund isn’t for going out for dinner, your emergency fund is your insurance policy against financial disaster. Separate your fund from your regular banking, don’t just stuff it in the savings account that’s listed right below your chequing; all it takes is two clicks of the mouse to transfer money so you can spend it. NO! That’s too easy. Deposit it in a seperate, free account, solely dedicated to being your peace of mind, your emergency fund, your FU money, your rainy day fund… you get the gist.
This post is in honour of my recently completed, bare-bones emergency fund which now sits at a very pretty $6,061.08. Eventually I want to have something like $10,15 maybe $20k sitting in that account but for now… this will do just fine! So, do you have an emergency fund yet, any tips for people just starting out?