Start Off On The Right Foot With An Emergency Fund

If you received a bill in the mail tomorrow, that you were not expecting, and it said you owed $400, would it be a financial hardship to pay that bill? In 2013 nearly 50% of adults would find paying that bill a hardship, and 20% said they would totally be unable to pay that. The silver lining is that with the boom in the economy since then, the numbers have improved. By 2020, only 36% indicated that the bill would be a hardship, and 12% indicated an inability to pay.

What Is An Emergency?

Photo of button labeled Emergency Pull courtesy Jason Leung on UnsplashThe reason for these answers is that many people have not successfully put aside at least $400 to pay for an unexpected emergency. What is considered an emergency? If you think back, you can probably come up with a situation where your response was “oh no, that’s going to cost me” or “oh, I don’t need that right now.”

If you’ve investigated how to manage your money at any level, you’ll find that there is universal advice to start an emergency fund for these unpredictable expenses. You may wonder how do you fund this and how much should I have?

Stop Digging!

There is a saying that if you find yourself in a hole, the first step out of the hole is to stop digging. Likewise, if an unexpected expense comes along, using a credit to pay for it is like continuing to dig that debt hole bigger. And that’s exactly what you do NOT want to do. An emergency fund allows you to have the money for those unexpected expenses without using debt to pay for it.

How Much To Fund?

The amount that should be in that fund can vary from about three months of expenses, to up to 12 months of expenses. The start of the pandemic in 2020 became a lesson for many that even having a steady and secure job doesn’t mean that nothing can cause a job loss. Some external force can suddenly cause you to become unemployed. Having an emergency fund can reduce stress on you and the family allowing you to focus on getting a new job.

If you are just starting out in the work world or being on your own, and you don’t have a lot (or any) money available, then start small and just get into the habit of saving a little bit regularly. Set an initial goal of saving $400 can be a good first goal.

Where To Find Money To Fund The Account

Going through the process of tracking expenses can often find a “want” that can be redirected into savings. One recommendation is to set up an online savings account. Fund this by deciding how much you can afford each paycheck or month and have that moved automatically to that new savings account from your checking account. If your workplace supports direct deposit with the ability to direct your deposit to multiple accounts, then use that to set up for a certain amount to be deposited automatically in that emergency account. Because it is coming from your check before your take-home pay you’ll never see it in your checking account so you won’t miss it.

Another option would be to set up an automatic scheduled bill pay to move that amount of money each month from the checking account to the savings account. Do this close to when you get paid so that you are putting it into savings first, rather than at the end when there might not be much left. This is sometimes called paying yourself first.

Finally, make yourself four goals for this fund:

  • If you have nothing, try to set $400 as your first goal
  • Get to $1,000 as the next goal. Note that you can reach that goal in less than two years if you can transfer $50/month.
  • Raise that goal to get to three months of expenses.
  • Set that goal of 6-12 months of expenses.

Don’t be as concerned about the timeframe to get to the goal. Be concerned about starting to make this a habit. You can always increase the amount saved regularly as time and more money become available to save. If you are working to pay off credit card debt, consider using the payment amount as a deposit into your emergency fund after the debt is paid off.

If you already have an emergency fund, comment and tell me how you funded it.