Why you need an emergency fund, or not at all?
Almost every money advisor, paid or unpaid, Christian or secular, advises that your first step to getting control of your finances is to save a certain amount for an emergency fund. This fund is for genuine emergencies, such as car wrecks, unexpected surgery, or flooded basements. It is not for car repairs, home upgrades, routine maintenance, or unbeatable sales at your favorite hobby store.
Why:
Some surveys show that 40% of Americans couldn’t handle an unexpected expense of less than $500. They live paycheck to paycheck and have to use debt (such as credit cards) to pay for these emergencies.
How much:
Most money steps call for at least $500 and up to $1500 to get started saving before you move on to other goals. We agree with this guidance. If you are single with few expenses (and a renter), then the lower amount is appropriate. The more children you have, or if you own a home, would call for much more than $500; $2000 would be a better start. After this initial amount, you will increase your savings to cover even more scenarios. Our main goal right now is so that a minor emergency doesn’t put you back into credit card debt.
Where:
This money has to be liquid, that is, you need to be able to access it immediately to pay for the car repair or flooded basement. We recommend a high yield savings account or even a checking account. You won’t earn much interest, if any, but you will have peace of mind that helps you sleep at night.
Look at your personal net worth. Write down the balances of your checking, savings, CD’s, cash, brokerage and retirement accounts. For the purpose of counting toward this step, we will only consider your checking, savings and cash. Exclude the amount in your checking account that is already earmarked for the next month’s bills (rent, utilities, groceries, etc.). How much is left over? If it’s less than your goal, read on. If you already have more than your goal amount saved, you are past this step. Congratulations. We will be examining increasing your emergency fund later.
How to get started:
Create your budget or spending plan. Identify where you can eliminate expenses, and get started cutting those things from your budget. This is the easiest way to save money each month. If you’ve identified your priorities, you can see where your spending isn’t aligned with them, and cutting expenses from your non-priorities shouldn’t be painful.
You can also sell items you no longer need via next-door or Facebook marketplace. You could work overtime at your job. Discuss with your partner ways to save money. Brainstorm the ideas and share them in our comments section.
Great article Jim!
Keep it up, would love to hear more of your money saving wisdom 🙂