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Emergency Funds
What is an Emergency Fund?
It is your safety net, your rainy day fund for the unexpected events in life. The pot of money you have set aside for when life decides to happen. And let’s face it. Life happens ALOT!
You blow out a tire driving down the road, your dishwasher stops working, you have an unexpected hospital visit, you need a new cell phone because you dropped yours in the toilet. Things happen, and they happen every day.
Things we do not expect, cannot account for or simply can’t control. And most of those moments when “life happens” require money.
In addition to life’s unexpected events, your emergency fund should have a minimum of 3-6 months of your total monthly expense saved in the event you are unable to work for any reason. As a financial educator, I like to see 9-12 months of expenses saved in an emergency fund. That said, starting with 3 month and moving up to the 12 month marker is a great place to start.
The importance of an emergency fund
Let’s use COVID-19 as an example of the importance of having an emergency fund. This is the first time people have been unable to work not because they are not capable, i.e. they got in a car wreck, their company closed, etc. but because of outside forces. A pandemic forced the shutdown of multiple companies and the employees are now out of work.
In this case, having an emergency fund with 3-6 months of expenses saved, would’ve helped alleviate some of the stress of being out of work. It won’t always be a pandemic that causes the need for emergency funds, other factors can impact your ability to work or obtain employment. That is why an emergency fund is so crucial.
Calculating Your Emergency Fund Needs
In order to calculate your emergency fund needs, let’s take this back to your budget! Everything in finance seems to come back to your budget doesn't it?
Here is a simplified example of a monthly budget and how you’d calculate 1 full month of expenses so we can set a goal for your emergency fund.
Now we have an average number for our monthly expenses, $3,679. I am going to round this number up to $3,700 just to give myself a bit of a buffer and it makes it easier to do the math for what I need to start saving.
If my expenses are $3,700 and I am just starting to build my emergency fund, I want to target 3 months in a savings account for myself.
That is where we take our total monthly expense and multiple it by 3.
$3700 X 3 = $11,100
3 months of expenses total $11,100. That is the 3 month savings goal for our emergency fund based on our monthly spending numbers.
It can be very difficult to save thousands of dollars, take it 1 month at a time and track your progress. The more you can monitor your progress, the easier it will be to see your wins! Plus saving money becomes addicting, you will truly enjoy the feeling of seeing your bank account balances increase and tracking towards a personal goal.
Use our Savings Tracker Tool to set your Emergency Fund Goal and track your progress as you save.
Setting Up your Emergency Fund
Figure out what your emergency fund has it in right now.
Use your monthly budget and determine what you are spending monthly. Make sure you are being honest with yourself about these numbers.
Now it's time to set your Emergency fund goal. Start with a 1-3 month goal in mind and make that your target savings goal.
Then start tracking your progress and building your safety net.
Remember, life happens! If you end up needing to use the money in your emergency, that is FINE! We have it saved for just that reason. Keep tracking, keep savings, and keep setting your goals until you have a comfortable amount for your lifestyle in your emergency fund.
FOR A DEEPER DIVE INTO EMERGENCY FUNDS:
If you need help building your personal budget, or want to step up your money game, visit us online atwww.financialfootwork.comand start the Ultimate Beginner Budget Course. Takes 20-30 minutes a week to train your money and start improving your financial game.
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Additional resources we love!
- Nerdwallet – All things personal finance website
- The BURN Podcast – Ben Newman | Performance Development Coach
- Increase your impact Podcast – Justin Su’a | Leadership Coach
- Micro-Empires Podcast – Jennifer Grimson | Entrepreneur
- Good (Yves)ning Podcast – Yves Batoba Personal | Development Mentor
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