According to Bankrate.com nearly 28% of Americans have no emergency fund whatsoever. Most people could not survive one month without pay. Even worse, in the event of an emergency of $1000 people would pay it using a credit card or loan. This makes me cringe!
So you created your first basic monthly budget! Congrats! I’m so proud you, you took your first steps to taking control of your finances. Did you have lots of trouble? I promise it gets so much easier the more you do it.
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Did you find you have money left over? Or did the ugly truth about your spending hit you in the face? You are spending way more than you bring in? Oh trust me, I have been in your shoes. It looks like there is no way out, but there is a light at the end of the tunnel. Just stick with me kid, I’ll lead the way. (What can I say, I have a toddler and we like Hercules! LOL)
If you have no idea how to do a basic budget, then you need to hop over and read the first post in this financial series, on the basics of creating a monthly budget. Here I will give you 3 pain-free steps to getting you started on the right financial path.
Now you should know how to make a basic budget, what’s next? You need to make yourself an emergency cushion. No I’m not about to give you a DIY on making pillows or seat cushions. LOL (hmm…that could be a thing! haha) I’m talking about about a financial cushion outside of your monthly budget. This is going to be for emergencies ONLY!
What is an emergency fund?
An emergency fund is simply money that is available to cover financial surprises or emergencies. Unexpected expenses can be extremely stressful and very hard on your wallet. Some of the most common emergencies include job loss, medical or dental, or transportation repair.
This isn’t going to be your spending fund, this will be money you can get to when an emergency happens. So your car broke down and you can’t get to work. Without transportation you will lose your job. Then the emergency fund can help. Just remember that when you take from this fund, you must put it back asap! If you remember me talking about taking Financial Peace University you already know that Dave Ramsey is like my financial guru.
I want to walk with you as we follow these “baby steps” as Dave calls them. Having an emergency fund or cushion is your first step. I applied these teachings to my life and it has made a huge impact on not only myself, but on my family as well.
How much money should you have in an emergency fund?
So how much do you need in this fund? This number should be enough to cover at least 6 months of expenses. This may seem ridiculous or impossible, but if you have no bills outside regular reoccurring monthly expenses, this number is not so far from reach.
For now we will start with a smaller, more easily reached goal. This number will depend on your household income. If your household makes less than $20,000 per year, than you need to have an emergency cushion of at least $500. If you make any more than that you need at least $1,000. This is just a starter, you will save more later once your bills are paid off.
When should I start my emergency fund?
You need to find money to start this fund like yesterday. I mean fast! You need to get your hands on this money as soon as possible. If you don’t have this kind of cash laying around, then I suggest you sell something or take on an extra job or two to get that money. Once you save this money, it will feel like a burden has been lifted.
Seriously, you have no idea how much weight was lifted once we started our emergency fund. This fund meant we did not have to use a credit card or take out a loan to cover an unexpected expense. When our icebox (aka refrigerator) went out, we would have been in a big pickle. Instead we were able to pick one out the same day and even got a great deal for paying it off upfront.
What if you spend more than you make?
When you realize you spend way more than you make, it can be scary. When I was in college my husband and I racked up some major credit card debt and we had bill collectors calling at all hours and making all kinds of threats. My first reaction was to panic, but then I took a deep breath and began looking for a better way.
The advantage to having a basic budget is that now you have a clear picture of what you have and what you don’t. You can also see exactly where your money is going. This is wonderful news because now you have the power to fix it.
If there are things that your income did not cover, list them out in order of importance. When making this list ask yourself, “If you had any extra money, you could pay for…” Keep this list handy and every time you find yourself with more income then you originally planned for, pay another thing on that list.
How to put money in an emergency account?
It can be a real downer to realize your financial situation is not up to snuff. I remember telling my husband that we would be out of luck if we needed cash fast. If it is life and death you will find a way to get that money, right. Well your finances are a matter of life and death to your future debt free self!
To put this into terms, let’s think about this hypothetically. You go on vacation to some super awesome island getaway, when you get home you start feeling sick. Going down fast, you go to the emergency room and find out after having done a gazillion tests, you have this super rare disease that you contracted on your vacation. The bright side is that there is a cure, but it is not covered by any insurance.
You have only one year left to live and the treatment will cost you $20,000 cash. You have 9 months to pay up. You wouldn’t think twice! You would do whatever it takes to get your hands on that money, right? While this situation is hypothetical, it isn’t that far fetched. It all comes down to prioritites.
Priorities are important.
You need to set priorities. You need to make sure your first priorities are food, shelter, clothes, and transportation. Everything else comes second. PERIOD. (Sorry for yelling, but you need to get that down!) If you are behind on your bills and are getting calls from debt collectors take these words to heart:
Do not let any bill collector bully you into thinking they are more important than your first priorities!
In the case of our hypothetical situation, you would not even blink on paying for something that is life or death. Life is our number one priority. Well when it comes to savings and your emergency fund, you need to see the life or death aspect of that situation and make it a priority.
The harsh reality is if you think it is important enough, you will make it happen. How easy is it to say to yourself, “Oh I need that new phone, or purse, or shoes, whatever it is that your love. It does so much more than my current one. It will make me more productive. I need, need, need!”
You somehow find the money needed and you make it happen, am I right!?! So why does it seem so ridiculous to find the money that will help secure your financial freedom!?!
Do you need ideas on how to get your hands of quick cash. I’m writing a post with lots of ways to get that cash fast. I’ll try to get that to you next week. If you need to know now and can’t wait, shoot me an email and I will give you some right away. I’ll make sure and update this post with a link to those ideas.
Start here with creating a basic monthly budget.
Learn how to make cash envelopes.
13 ways to get quick cash to start your emergency fund.
You are doing great. Keep up the good work. If you liked this article share it!
Be Fearless,
Candace 🙂
