Did you know 47% of Americans would not be able to cover an unexpected $400 expense? Is that surprising to you, or are you one of them? I used to be and it wasn’t fun. It kind of felt like living on the edge of a cliff. I was always watching my step, afraid to fall off.
There are different names for having a large pile of cash sitting around. Some people call it a Rainy Day Fund, or Just in Case Fund, but I prefer Emergency Fund. That name reminds me that this money is earmarked for an actual money problem that I may (will) encounter.
The size of your Emergency Fund is completely up to the circumstances in your life, and even your temperament. Not just the simple questions like How much money do you spend in a given month, but others like How stable is your job? Are you part of a dual income household? How many dependents are depending on you? How quickly do you think you could obtain a new income stream if you lost your main source of income?
When you are debt-free you need much less of an emergency fund because you are not making gigantic payments to the bank each month. But if you are struggling under debt, maybe your emergency fund isn’t very large yet.
In my case, my husband and I both work full-time. We have no dependents. His job is extremely stable (almost 20 years at the same company). I could reasonably find another job pretty quickly if I needed to, or at least unemployment insurance. We don’t spend as much as we make, so there’s some flexibility in our budget that we could take advantage of if something happened and we may be able to cash-flow it rather than dip into the fund.
We’ve opted for a six month Emergency Fund, meaning we could cover all of our expenses for six months if we both lost our jobs (highly unlikely). Notice that I said EXPENSES and not income. You don’t need six months of your income if you are saving 50% of that income into retirement accounts. You need to cover your expenses while you are job hunting or building a new business or whatever.
I cannot stress to you enough the peace of mind that having this money has brought into our lives. I can vividly remember losing a job and feeling extreme desperation, not being able to cover rent next month and scrambling for a new job (any job!). I remember checking my bank balance before grocery shopping. I remember Fear.
Having a strong foundation underneath you (that is not built of credit cards) is such a freeing sensation. We have so many more options now than before. It’s like a safety net that removes the stress and fear of any little thing going wrong. Now a flat tire is no longer a money emergency – it’s just a minor inconvenience. Removing the fear of small emergencies allows you to shift in your thinking from “getting by” to “planning for the future”.
Ways to Save a Baby Emergency Fund:
- Hold a garage sale
- Sell small things on eBay
- Sell big things on Craigslist
- Trade in your car for one less expensive (with a smaller payment)
- Cut cable or expensive data plans
- Cut little recurring expenses like warranties, magazine subscriptions, or gym memberships
- Do a 30-day No Restaurant Challenge
- Do a 30-day No Shopping Challenge
- Do a 30-day Pantry Challenge
- Any money windfalls (Christmas, Tax Return, Extra Paycheck) can immediately set up a small emergency fund.
Any little bit counts, and it can only get you closer to your goal. Make a fun thermometer and hang it on the fridge to color in as you make progress. Get the whole family involved. Plan a fun celebration (game night with grocery store pizza!) when you hit your target.
Having a little emergency fund as you are paying off debt will help ease the pressure to put unexpected expenses on a credit card or get another small loan. You’ve got cash, so you can cut up the cards and not look back. Get some breathing room. You can do this.