Why Should Your Family Have An Emergency Fund?
What the heck!
The ABS warning light on the instrument panel of the car lit up.
Two seconds later. Another light. A yellow exclamation let me know that the adaptive cruise control was malfunctioning.
Two more seconds. A message and yet another flashy light informed me that the car turned off the cruise control.
You’d think this was a piece of crap car.
It’s simple though, things happen - emergencies of different kinds happens.
Weird car lingo aside, this actually did happen to me when driving home from work. Strange technical issues in a rather new car. Nothing I expected to happen for a few years. To make a long story short, this display of funky lights on the car panel resulted in a total cost of about $800.
It wouldn’t matter if we didn’t use the car much. But we need to drive our daughter to school and use the car to go buy groceries. I also need to get to work, so it helps to have a car that works.
As you understand we needed to get the repairs done fast.
Could You Afford A $1 000 Expense Today?
Your fridge breaks down. The car breaks down (it’s a real thing, I can vouch for that). Something else breaks, TV, computer, smartphone. Anything that you need which will set you back anywhere between $100 - $500. Could you handle that expense right now?
A lot of people can’t, as you can see in this article. Six of ten Americans have less than $500 in savings. So the odds are in my favor when I assume that you can’t handle an unforeseen $1000 expense.
Don’t feel embarrassed if you're one of the people who can't afford an expense like that.
People usually don’t plan for the unexpected. It makes a certain kind of sense. Why plan for something you don’t know will happen. But as I said before, emergencies happen.
It doesn’t have to be dramatic. It doesn’t have to be something breaking. It doesn’t have to be someone getting sick or needing medical aid.
You could lose your job.
You need to find a job fast. If you don’t, it's likely that you might go into debt to handle your expenses. Like many others, you turn to your credit card.
Before you know it you find yourself in a cycle of debt and you can’t find a way out.
If only you had an emergency fund to cover your expenses those first months.
The Magical Power Of An Emergency Fund
An emergency fund will not make bunnies jump out of top hats. Ok, so it’s not so magical after all. I only wanted to grab your attention with a magnificent headline.
Are you also thinking of bunnies and money jumping out off a top hat? No? Only me then.
Let’s still assume there’s something magical about an emergency fund. Because you will feel like it is if you ever need to use it. Imagine the scenario where you lose your job again. Just like that. The imaginary cartoon boot in the butt and you’re out the door. No prior warning.
Think of the emergency fund as a buffer between you and debt. The fund is an airbag between you and serious financial trauma.
There's a common recommendation in the personal finance field. Have enough money to cover three to six months of expenses in the fund.
That sounds like a lot.
It needs some clarification, though. It’s supposed to cover your necessary expenses. When living off the emergency fund you have to say goodbye to luxury. Yes, Netflix and Spotify are luxuries. You strip down your expenses to what you need to get through the crisis.
You want the money to last as long as possible. You might not know when your situation will change. If you waste money on things that you don’t need to survive then you’re also tempting the debt dragon to come and eat you.
The first step in setting up a long-term fund is to have a good view on your expenses a normal month. Don’t know how much you spend on your necessary expenses any given month?
Time to get the calculator and a bank statement out. Calculate six months, add them up and divide by six to get an average value. That’s your target for each month.
Put the money away in an account where it’s easy to access. In fancy financial speak, that means to keep it as a liquid asset. You might need to get the money with a moments notice.
Are you kidding me, three to six months expenses?
To some people, it sounds like a joke when people tell them to save that much money. Not only save it but then let it sit in an account. Not doing anything.
It does. Till the day you need it.
I can preach about emergency funds for hours. But it gets boring to listen to. Most things that concern money gets boring to listen to after a few hours. Unless it involves top hats, bunnies, and money!
Top hats are cool, so is money. Bunnies just speak for themselves. Cute. Fluffy. Cuddly.
Where was I...?
Oh, right. Instead of ranting on I will challenge you. I challenge you to start your own emergency fund. Take action.
You know how you need training wheels when you learn how to ride a bicycle? With the same idea in mind, I will not ask you to start with three months of expenses. Some basic psychology tells me that if the challenge is too hard it won't be fun either.
The $1040 Emergency Fund
With an emergency fund of over $1000, you would be well ahead of 60% of all Americans. Bet that would feel good.
Are you thinking that there's no way for you to save that kind of money? You might be right. I don't know your financial situation.
What about if we make this a long-running challenge and you come back in one year and tell me if you managed to do it. Does 1000 bucks in one year sound doable?
I'm still not going to drop you in the deep end of the pool without arm floaties. I'm not that mean.
I like bunnies and stuff, remember.
I have created a sheet that will help you by telling you how to save. Week by week. You can also track what you saved with a nifty checkbox.
If you want to print it and hang it on your fridge, there's one version for that. If you're more geeky and digital, like me, there's also a spreadsheet. Pick which one you like, or use both.