What is an Emergency Fund?
An emergency fund is a savings account that is specifically set aside for unexpected expenses. It is a financial safety net that can be used to cover unexpected costs such as medical bills, car repairs, or job loss. It is important to have an emergency fund because it can help you avoid taking on debt or dipping into your retirement savings when an emergency arises.
Right now in 2023 more than 60% of Americans are living paycheck to paycheck. For those people creating and saving for an emergency fund seems overwhelming. First thing you must do is invest in your future self. Some experts believe you should have an emergency fund before investing. I disagree but don’t discredit the need for an emergency fund. Aside from your Retirement accounts, your investments can be part of an emergency fund and investing wisely can grow that money at your disposal more quickly.
How Much Money Should I Have in an Emergency Fund?
The amount of money you should have in your emergency fund depends on your individual financial situation. Generally, experts recommend having three to six months of living expenses saved in an emergency fund. 3 to 6 months is a great goal! This means that if you were to lose your job, you would have enough money to cover your basic expenses for three to six months. However, if you have a higher income or more financial obligations, you may want to save more.
My day job is heavy industrial construction and in my line of work my job is to work myself out of a job. Yes I make really good money for a high school drop out with only a GED but sooner or later what I’m building get built. What happens then is a layoff or ROF (reduction of force). Yes you can unemployment but it is small potatoes compared to my usual salary while working. Some times the next opportunity is not exactly immediate and I usually have to relocate at least temporarily for the next work assignment.
If you are living check to check like the now majority of Americans, saving for 3 to 6 months of expenses isn’t going to happen very quickly. Your budget should have a retirement savings plan on investing, but you should also be investing for your future long term but not so much waiting for retirement. I think a great goal would be involve saving and investing 15% of your income. 6% towards retirement, 4% cash savings and the other 5% towards investments where you can withdrawal quickly if the need arises.
Benefits of Having an Emergency Fund
Having an emergency fund can provide peace of mind and financial security. It can help you avoid taking on debt or dipping into your retirement savings when an emergency arises. It can also help you avoid having to make difficult financial decisions in the heat of the moment. Additionally, having an emergency fund can help you stay on track with your long-term financial goals.
While having money in your savings account allows for quick and fast access to funds quickly it doesn’t grow. Returns on savings account suck. Which is why I disagree with building an emergency fund before you start investing. When investing is done right you can build an emergency fund more quickly because you’re using money to make you more money. Think dividend stocks that pay dividends that get reinvested. Or even growth stocks that have a historical level of growth year to year.
Strategies for Building an Emergency Fund
Building an emergency fund can seem daunting, but there are several strategies you can use to make it easier. First, start small and set a goal to save a certain amount each month. You can also set up automatic transfers from your checking account to your emergency fund. Additionally, you can look for ways to reduce your expenses and use the extra money to build your emergency fund. Finally, you can look for ways to increase your income, such as taking on a side hustle or selling items you no longer need.
With any budget you must set goals. What has worked for me is working on milestones and setting those milestones as thresholds not to go below at each achievement. Meaning if once I have $100 saved and all my bills are paid, I consider myself broke when i get down to only having that $100. Then you do the same thing til $200, $1000, and $10,000 and beyond. Your bills and financial obligations must come first for this to be effective. Try cutting cost and reducing expenses to achieve it. Virtually everyone no matter how little your income maybe can find someway to save money to start building a emergency fund.
Overall, having an emergency fund is an important part of financial planning. It can provide peace of mind and financial security in the event of an unexpected expense. The amount of money you should have in your emergency fund depends on your individual financial situation, but experts generally recommend having three to six months of living expenses saved. There are several strategies you can use to build your emergency fund, such as setting up automatic transfers, reducing your expenses, and increasing your income.