I can guarantee at some point you’ve wished you didn’t have to go to work tomorrow. For me this was once a daily occurrence. For most of us the need of a regular income has kept us tied to our desks, especially in jobs we dislike. I’ve had countless conversations with friends, colleagues and strangers about all the things we wished we could do if… Eventually I realized that I the difference between if and when was within my control.
In one of my first jobs, my boss informed our team that due to a technicality/timing issue our paychecks would be a month later than expected. The team was outraged, except me. Everyone had made promises for that money, legitimate ones like rent and student bills, but promises nonetheless with money they didn’t yet have. However, I had enough savings to hold me over one more month. My perspective was I can’t always control what will happen to me but I can control where my money goes and I started my emergency fund.
But that’s not why emergency funds (once fully funded) are so cool. The coolest part about an emergency fund is it gives you the freedom to make rational decisions in stressful moments. Fortunately for us it was just a delay in payment but its possible that you could be let go from your job or an emergency occurs that is bigger than your budget. It could be anything– your company is shutting down; your roommate just said they’re moving out; your car has broken down for the last time; your kid needs braces. Now you have to sacrifice your fun budget (aka disposable income) or increase your debt, possibly making a spending decision that costs more in the long term. In these times, emergency funds are crucial.
Let’s take the car example. Your car breaks down so you go to a low key mechanic because he gives you a cheap price. He said he fixed the issue but really he just patched it up and you find yourself in the same situation 2 or 3 more times. If you had your emergency fund you could have gone to the dealer, paid a bit more, but you would have been secure in your car’s repairs.
So how do you start your emergency fund?
- Set a goal: Emergency funds should include 3-6 months of living expenses. Why so much? 3-6 months is the average time spent job searching.
- Open a high interest savings account: I like to maximize my money so I use Ally for my savings accounts but you can find other high interest options here: bankrate.com
- Fund that account! Set up regular deposits direct from your paycheck or automatic transfers from a checking account to set yourself up for success.
- How much to put in? I like to start with how much I want in my account but others may choose to start with what they can spare. It’s recommended you save 20% of your income but if you have other savings goals you would split that amount between your goals.