Build Your Emergency Fund
Unexpected expenses are an unavoidable fact of life. At some point, someone will get sick or injured and need to go the Emergency Room; You will run over a nail and need a new tire; The heat will die on the coldest night of the year. While on your journey to become debt free, you must avoid acquiring additional debt. An emergency fund is there so that you are prepared to handle these unforeseen events in cash, without the use of debt.
What is an emergency fund?
An emergency fund is money set aside for the purpose of paying cash for unforeseen events
Should be kept in a savings or money market account that is not tied to your checking account
An emergency fund is not for the purpose of saving for a purchase
Should not be used for anything except for a legitimate emergency
What is an emergency?
Unforeseen, impossible to budget for because it is unexpected
Catastrophic consequences,
Examples:
You ran over a nail and need a new tire
Your hot water heater failed and is leaking water all over your floor
Your kid got injured and needs to go to the Emergency Room
What is not an emergency?
Luxuries, hobbies, wants
I broke my headphones and “need” a new pair
I broke a fingernail and “need” it fixed
We are having company and we “need” a bed for the guest bedroom
Many “emergencies” are items that should have been planned. Your tires do not become bald overnight. You should plan for and place new tires in your budget
Why do you need an emergency fund?
An emergency fund protects your investments, prevents you from going further into debt
Things do not always go as expected, Unexpected events are around every corner
Without an emergency fund, you will be forced to use debt to solve your problem. It is impossible to get out of debt if you continue to borrow more money, even for an emergency
Having an emergency fund gives peace of mind knowing that an inconvenience will not turn into a catastrophe
How much should be in my emergency fund?
If you have any debt, I recommend a starter emergency fund of $1,000 - $2,000.
After you pay off all debt except for your mortgage, boost your emergency fund to cover at least 3 months of your expenses.
When should I start an emergency fund?
Immediately, as this will protect you from acquiring additional debt for an emergency. Saving an emergency fund is the first step towards getting out of debt.
How can I save $1000-$1500 if i don’t have any extra money?
Cut expenses and uses the money towards your emergency fund
Examples: Cut cable, reduce trips to the barber, hair stylist, stop eating out, pack lunch for work, plan your trips so that you use less gas, plan your meals, reduce waste
Generate extra income
Sell things from your house, have a yard sale
Take a part time job
Start a side hustle
Turn your hobby or passion into money
