“Emergency” is a pretty subjective term. Your mom might call burning the Thanksgiving turkey an emergency, wherein $80 and some patience could save the day. Although having enough money to resolve Thanksgiving mayhem is great, you’ll want your emergency fund to be able to put out some larger fires.
Everyone should prepare themselves for an emergency; it’s how we make life much easier when things take an unexpected turn. Parents, retired adults, and student emergency funds might all look different, but it’s a great backbone at every life stage.
So, how should your emergency fund look?
The Right Amount of Money For Your Emergency Fund
It’s great to feel prepared, but building an emergency fund that covers everything is unrealistic. You don’t want your emergency fund to be too little, but you shouldn’t overwhelm yourself with extreme standards. So, what’s the perfect medium?
There’s no one-size-fits-all to an emergency fund; how much money you should save depends on what kind of person you are. If you’re very anxious, the bare minimum might not be as comforting to you, and if you run on the riskier side, large savings might have you itching to put your money towards other investments.
A good rule of thumb is to stash away three to six months' worth of your living expenses. If life costs you $1,000 a month, aim to put away $3,000 to $6,000 for emergencies. A few months' worth of living costs can be an excellent safety net when needed.
An emergency fund will ease your anxiety, enable you to take some riskier risks, and save you a lot of discomforts when put in a tough situation.
How To Start an Emergency Fund
Your emergency fund will not appear overnight; it will take some time to grow. When starting to build an emergency fund, you’ll need a few things in place before you get started. Here are the three steps everyone should take to build their emergency fund.
Step 1: Create a Budget
A budget lets you know your expenses and how much you should save each month to start your emergency fund. If you aim to have three months' worth of living expenses put aside, you need first to find out how much money that equates to.
Your budget will give you an idea of how much money is needed to sustain your lifestyle. A budget accounts for your income, living arrangements, food, subscriptions, outings, and other costly aspects of your life. If done correctly, your budget will tell you how much money you should delegate towards an emergency fund.
Because your budget lists all of your expenses, you can easily calculate what three months' worth of living costs you. Take your monthly expenses, multiply the total by three, and that’s the number you should aim for.
Step 2: Budget For Your Emergency Fund
You want your income to be at least double your expenses; that way, you can put money aside each month for things like investments, savings, and your emergency fund. If all your money goes straight to your expenses, then there’s no chance of growing a cash stash of any kind.
If done correctly, your budget will tell you how much money you can delegate towards an emergency fund. The most common budgeting model is the 50-30-20 budget. This model recommends that 50% of your income goes towards needs (rent, food, transportation), 30% to your wants, and 20% is for your savings.
Although the 50-30-20 budget accounts for savings, it doesn’t specify how much of the 20% should go to your regular and emergency savings. You can navigate this dilemma in two ways; by focusing on just your emergency fund until you reach your savings goal or by dividing your attention to both savings pots. In either case, putting 20% of your income towards savings is a very responsible way to manage your finances.
Keep reading to see how these two savings plans would pan out.
Step 3: Build the Emergency Fund
Once you know how much money is left over after covering your wants and needs, it’s time to navigate your savings. We usually save for two things: fun opportunities and emergencies. You can decide to save for both at once or focus on one at a time; here’s how both scenarios look:
Let’s say your monthly income totals $2,000. Under the 50-30-20 budget, $1,000 will go towards your needs, $600 towards wants, and $400 to savings. In this scenario, a healthy and recommended emergency fund will total $4,800 ($1,600 wants and needs x 3 months of living expenses). Alrighty, it’s time to get that $4,800 together.
Prioritizing the Emergency Fund
If you’re good at sticking to your budget and decide to focus on your emergency savings, it will take 12 months to save up a healthy emergency fund ($4,800 emergency fund) / $400 income put to savings = 12 months of stashing).
One year of diligent savings to have three months of living expenses covered may feel like a lot of time, but it’s not like you’ve been restricting yourself from your wants throughout the year. You still get to order your poke bowls and visit the pop-up art galleries; it’s not the worst position to be in. Plus, you get to finish the year with an emergency fund built and the anxiety of a crisis happening put behind you.
Working to Build Both Cash Stashes
Under the same circumstances, with $400 to put away each month, you might want to delegate your money differently. Let’s say you decide to use half of your savings for investing in stocks and the other half for your emergency fund.
Building the recommended three months of living expenses will take you 24 months ($4,800 emergency fund) / $200 income put to emergency savings = 24 months of stashing). Although your lack of focus will add an extra 12 months to building your emergency fund, it will help you put $1,200 towards investments that have the potential to grow.
How you decide to go about creating your emergency fund is up to you. Does the fear of an emergency make you want to put all of your energy towards building the fund as quickly as possible, or do you prefer to put your eggs in multiple baskets?
Remember that starting your emergency fund starts with your budget. The more you minimize your wants and needs, the more you can put towards your savings. When you’re still living with your parents is one of the best times to focus on your emergency fund; no rent, no utilities, all the savings; oh, what a treat.
DON’T TOUCH YOUR EMERGENCY FUND
Your emergency fund is for emergencies! Don’t use the money you’ve worked so hard to save on Thanksgiving catastrophes or the newest Post Malone collab.
The best way to keep your hands off your emergency fund is by separating it from your everyday spending money. Try to keep your needs, wants, and savings separate by using different savings or checking accounts for each.
If you’re sticking to your budget, you won’t have to worry about navigating credit cards. A credit-building debit card like Extra will help you stay on track with your savings and avoid the dangers of credit card debt that can put you behind.
It feels amazing to have a sturdy emergency fund. Being prepared for emergencies helps you feel relieved and powerful to navigate the world with less fear and more confidence. Surely get started building an emergency fund if it’s been on your mind; you’ll thank yourself someday.