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Ah, the Emergency Fund. This is something all budgeting people talk about as if everyone knows what we’re referencing. If you don’t know, it’s rather self-explanatory, but let’s talk about it in depth today to make sure we’re all on the same page.
What is it?
The Emergency Fund is your large stash of easily accessible money in case of, you guessed it, an emergency. Let’s hash out the highlighted portions of this definition, shall we?
- Large stash: This is not chump change that we’re talking about. Ten dollars is not going to get your very far if your car breaks down. I follow Dave Ramsey’s* recommendation of a minimum of $1,000 in this fund. Sadly, most emergencies are not cheap. Even $1,000 may not get you very far these days, but it will certainly help and it’s a heck of a lot better than $0. I want you to get your $1,000 saved up as quickly as you can (we’ll get to how you can do that in a minute) so that you can stop living with the constant anxiety that comes from a paycheck-to-paycheck lifestyle. Ultimately, you need to have 6 months of living expenses in this fund. That will allow you a cushion if, for some reason, you lose an income. In the case of job loss, it gives you plenty of time to look for a new one without getting into financial trouble. In the case of an inability to work due to health reasons, six months will usually carry you through until your long-term disability insurance begins (read more about insurance policies and my recommendations here). For most other types of emergencies, this will be a sufficient amount of money to meet insurance deductibles and/or cover the problem.
- Easily Accessible: Your 401(k) and Roth IRA do NOT count as Emergency Funds. Sure, you may have thousands of dollars there, but they are not easily accessible. These are not appropriate locations for this fund because you will take a major tax hit if you try to remove money from them. Investments in stocks also do not count. Depending on how the stock market is performing on the day of your need, your account could have many thousands or a few dollars in it. That is not reliable enough. It should go without saying that your real estate investments do not count. You’re not just going to go out and sell a house to pay an unexpected medical bill. Conversely, money in a shoebox under your bed is a little bit too accessible. A happy medium is a savings account. I know that the interest rate on an account like this is terrible. This is not a money-making investment and it is not meant to be. This is your personal little insurance fund and it just needs to be parked somewhere safe. If you never need it, fantastic. Consider it to have been an investment in your peace of mind. If you need it, you will be so grateful that it’s there.
- Emergency: I worked in an Emergency Department for almost a year and there seems to be very wide range of ideas on what constitutes an emergency. Just to set the record straight, a cracked false nail does NOT, but I digress. Here’s the Merriam-Webster definition: “an unforeseen combination of circumstances or the resulting state that calls for immediate action.” That’s pretty good for our purposes, but my definition of a financial emergency is, “Any unexpected, unavoidable expense larger than you can fit into your monthly budget.” That rules out an online shopping spree or other negligent spending and if it’s only a few bucks, you can usually just squeeze it into that month’s expenses. It also rules out the large expected expenses like labor and delivery, replacing a vehicle, or updating your home. Other expenses are going to fall into the domain of the Emergency Fund.
Why do I need it?
Every day I hear people talking about being down to their last few dollars before their next paycheck. The last FEW DOLLARS!!! That kind of stress will wear you down. Hearing about it stresses me out! There is a much, MUCH more liberating way to live and I want you to find it. I promise you can save money. It may not be easy, but you can do it. You control your spending and you have the ability to save this fund and get the weight of the paycheck-to-paycheck lifestyle off your shoulders. Emergencies are unavoidable and you need to be as prepared as possible for them. Commit to making this happen.
How do I get it?
Alright, now we’ve gotten past the definitions and we know why we need it. Let’s talk logistics. Just like weight loss, saving money boils down to mathematics:
Amount in – Amount out = Gain or Loss.
However, unlike weight loss, we want gains in this situation. If only the practice was as easy as the concept. There are two ways to adjust this equation in our favor. We can either increase our income or decrease our expenses.
Increasing your Income
Unless you’re due for a raise, this is usually in the form of a side job. In the technological world we live in, there are a bajillion side jobs that you can find.
- Craigslist: Legitimate jobs are out there. I had a great side gig that I found on Craigslist when we were paying off debt, so I can testify that they are there. Here’s my advice: Have a very low threshold for creepiness. If it seems sketchy, just back away and try not to look directly at it. For the love of all that is holy, do NOT give out any information other than your name, email, or phone number. No one on Craigslist needs your social security number! I found that the legitimate jobs responded to my interest with a phone call rather than an email in poorly translated English. Here’s one last suggestion: if a man has a listing for a “personal assistant,” it is very likely that he does not have your best interests at heart. Stay sharp out there, folks.
- Virtual Assistant: There is a LOT of time that goes into running a website and creating a blog. Many bloggers have hired a Virtual Assistant to help them with things like social media, emails, and scheduling. That could be you!
- Holiday jobs: Christmas is coming and a lot of retail stores will be hiring for seasonal help. Working in a Christmas store could be fun! Just make sure you aren’t spending your money on all the cute stuff.
- Etsy: Do you make something that you could sell? Look into starting an Etsy store. This one will require some research and start-up costs and it won’t be a get rich quick scheme, but it could work for you.
- Start a blog: I got mine started with this tutorial. This is a much slower form of income that may not pay at all for a while, but if you love to write and have something to say, go for it!
- Sell stuff: I just recently read this great article about selling your gently used items online. Marketing your things online in a way that generates interest is a skill. Take a few minutes to read about it before you start so that you can maximize the potential.
- Babysit/Pet-sit/House-sit: These are things you can do on the weekends. Some people will pay good money to have someone keep their pet in their own home while they are out of town.
- Yard work: Start mowing yards on the weekends. This is a side job that pays a pretty high hourly wage.
Decreasing your expenses
Most of my blog is devoted to this topic, but I’ll cover a few practical, easy options here.
- Make a budget: See my post about How to Create a Budget to learn more. You can also click here to sign up for my printable budget forms with tips to help you get started. Make the budget and then stick to it.
- Have no-spend days: Set aside entire days where you spend no money at all. This will require planning but it’s kind of a fun challenge.
- Pack your lunch: Eating out is so expensive! I know $5 for lunch doesn’t seem like that much, but that’s $100/month and if you and your spouse are both doing it, it’s $200. That’s over half of our monthly grocery budget. I promise you can pack meals for less. It’s also a lot healthier.
- Re-purpose and recycle: We wash and re-use Ziploc bags and gently used tin foil at my house. If it’s re-usable, do it. Get creative with this. Don’t be a hoarder, but think about how you might be able to DIY or re-purpose something before you go and buy a new one.
- Save on energy: turn off the lights and TV when you leave the room, unplug chargers, keep the thermostat settings slightly uncomfortable. These things are habits and you will adjust, but they can save a lot of money over time.
If you decide you are going to do this, you can absolutely do it. A creative, motivated woman with her vision set on a goal is unstoppable. Make a plan of action and jump to it. I am cheering you on, friend!
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