An Emergency Fund- Your Guide to Why and How to Get Started Today

If you were to lose your job tomorrow, would you be able to meet all your obligations? How much  money would you need to pay your rent/mortgage, buy food and provide for your family?

Would keeping the lifestyle that you have today be an option?

How long do you estimate it would be before you

could get back on your feet?

For years, people have talked about the idea of establishing an emergency fund.

This fund is not the pension you are paying at your current job. It is not the money you are trying to save for your next vacation, or to send your kids to school.

This fund is money that you put aside, in case of a rainy day. It’s made-up of money that you will only use under special circumstances. This fund is to support your lifestyle in case something that doesn't allow you to earn a regular income happens.

Who should have an emergency fund?

Everyone should have an emergency fund. Like we saw with the pandemic, you can lose your job in the blink of an eye. Getting a salary cut, or significant reduction in the hours you work can happen overnight.

Your business can be forced to shut its doors.

So whether you are an employee, self employed or a business owner, you should have an emergency fund.

Benefits of an emergency fund

1. It Buys You Time

In the case of sickness, layoff, economic downturn and pandemics, an emergency fund buys you some time. It buys you some time to re-group and figure out what your next step is.

2. Reduces Stress

Having an emergency fund gives you calm and peace of mind. You know that if things don't go your way, you have a cushion of money to support you.

3. Pushes You To Take Risks

It helps you to take more risks. Life sometimes requires that you take more risks to reap greater rewards. Having an emergency fund gives you courage to take these risks. Especially as business owners. Your businesses can grow when you take risks to push it forward.

4. Increases Confidence

An emergency fund gives you increased confidence that you will be able to handle what life throws at you. It removes the stress of money problems being one of those crises.

5. Helps to Avoid Bad Debt

An emergency fund also helps you to avoid becoming entangled in bad debts. Sometimes, because of the stress of a situation, you take the easiest solution out. This usually includes borrowing money at high interest rates. In the long run, these debts can become extreme financial burdens.

An emergency fund helps you to avoid this.

How to go about Starting an Emergency Fund

1. Figure out your monthly expenses

The first step in starting your emergency fund is to figure out your fixed monthly expenses. This means, sitting down and taking time to write down how much money you pay for:

• Rent/mortgage
• Car loan
• Utilities
• electricity
• water
• gas
• Internet
• cable
• Other Fixed Expense

Now that you know your fixed expenses, you need to figure out what your average monthly variable expenses are. These can get a little tricky, so be honest with yourself to make this exercise worth it.

How much do you spend on…

1. Groceries/Food

2. Eating out

3. Clothes

4. Cleaning supplies for your home

5. Yard care

6. Clothing

7. Medical Expenses

8. Travel & Entertainment

9. Any other expenses your household has from month to month.

Now, you need to add these numbers up. It's also important to identify anything that you could  live without for a few months. For example, buying clothes or eating out.

The number you get when you total this up, is the money you would need for one month. You now need to decide how long you should have an emergency fund for.

2. Figure out Your Emergency Fund Number

Originally, it was recommended that you have an emergency fund for 3-6 months. Recently, most people have increased that number to a year.

If this is your first time saving for a rainy day fund, I would recommend aiming for 6 months or more.

So multiply your monthly expenses by 6 or the number of months you would like to have covered.

This number is the total amount you need for your emergency fund.

Is it bigger or smaller than you expected? Do you think it's doable?

How to go about Saving for the Fund

Now that you know what your number is, it's time to start saving for it. Break it down. What percent of your current income can you commit every payday to adding to this fund?

The percentage should not be less than 10%. If you can't commit 10%, it means you need to re-evaluate your monthly spending habits. Try to find things you can cut out.

Now, create a second account, and automate it. Talk to your bank, or your work. Tell them that they should put your designated percentage of income directly into that account every month.

This will trick your brain to believing that you didn't receive the money at all. It will also help you to be more disciplined and live within the 90% of income you actually get to see.

Be disciplined enough to never touch the money, unless you have a rainy day.

You can even instill a penalty for yourself. Increasing the percentage you need to save by 1% every month if you access the money when it's not a rainy day.

The challenge

Sit down, and figure out your rainy day number. And put a plan in place to achieve this. It's one of the most important steps to financial freedom.