Knowing how to build emergency fund, everybody learns this hard lesson by missing the emergency fund when he/she gets into trouble paying for unexpected last minute bill
This personally happened to me in 2018 when I had to fix my car urgently
First, I consider myself clever when it comes to buying all of my used cars
Although I choose a perfect Japanese cars but the inevitable happened
I had to change completely my entire rusted muffler
In fact, I couldn’t defer it and since I went to my trusted mechanic, I had to change few other things that were about to be defected soon
I paid around $700 cash as my mechanic accepts cash and checks only
I learned from this lesson and I started to build emergency fund immediately
It is a gut-wrenching situation, I don’t want you to get into this situation
So let me talk about how to build emergency fund in less than 30 days
What is emergency fund
In very simple words, an emergency fund is a personal money you set aside for a very last minute payment which you didn’t handle when you created your monthly budget
Examples of unexpected expenses can be an urgent car repair, medical or dental bill not covered by your medical insurance, urgent renovation to your home, God forbids if you get laid off
Finally saving for emergency fund for something completely would never cross your mind like COVID-19
What is an emergency fund money used for
Don’t give yourself an excuse to use your emergency fund to pay for holiday parties or gifts
You know Thanksgiving and Christmas come to you same time every year
They are not an emergency anymore so you plan ahead for holiday seasons
Build emergency fund to cover the unexpected events where you have no control of predicting them at all
A question here to you, if after a very strong wind you start seeing few shingles from your roof blew away
Next year when most of your shingles start falling off, do you consider replacing your roof from your emergency fund
I believe you should not as you were already aware of the incident long time ago
Ask yourself the following 3 questions before you use your emergency fund
- Is it unexpected?
- Is it urgent?
- Is it necessary?
If you answer Yes to all the above then you can use the emergency fund money
Do I really need an emergency fund
Let me ask you this question below and be honest to yourself
Do you think you can complete a full year without facing any unexpected expenses?
I would say it is almost impossible to complete 6 months without having last minute bills and unexpected expenses
You have to embrace the inevitable nature of life
How much money should you save in your emergency fund
According to some financial planners, you need to save from 3 to 6 months of all your household expenses including the mortgage/rent payment
If you have a realistic budget, you would easily know all of your running expenses for recent months
Don’t get discouraged, start today by saving as little as $100 as a start up step
According to Dave Ramsey 7 baby steps to build emergency fund
Step 1 is to save a minimum of $1,000 to protect you from borrowing money while you tackle step 2 for paying all of your debts
Is $1,000 enough for emergency fund
According to Dave Ramsey’s book the Total Money Makeover
This is step 1 which I described above
Dave Ramsey calls it the baby emergency fund plan saving $1,000 as a first step
For those who have credit cards debts or other loans to pay saving $1,000 for the emergency fund is more than enough to handle any unexpected emergencies like a repair for your car or urgent medical bill
What Is a Fully Funded Emergency Fund
I discussed above step 1 – saving the first $1,000 then step 2 – paying all of your debts
To establish what is called a fully funded emergency fund, both income household should save 3 to 6 months for their household expenses
I say 3 to 6 months of expenses, I didn’t say income
Income is what you bring from your job while expenses are what you pay as essential expenses to keep your house running
Is savings the same as emergency fund
Are you confused between savings for retirement or investment and saving for an emergency fund
If you have no previous savings, start saving the money for the emergency fund first
Keep in mind that you are saving for an emergency fund to cover sudden incidents
On the other hand, you don’t save for your retirement with a plan to break it for unexpected expenses
You should save for retirement in long term investment saving plan
How to build emergency fund with no money
Now assume you are excited to build emergency fund immediately
Perhaps because I convinced you with the idea of building a contingency plan to face the unexpected incidents in life
Or you started freaking out in time of recession and you hear stories from friends or family members about recent layoffs
Whatever the reason behind your decision to build emergency fund
1) Start by opening a saving account with high interest rate and deposit $1 into it
Make a promise not to touch it in unnecessary expenses
You know the rules and I assume you are adult enough
Dave Ramsey ‘s Total Money Makeover suggested to open a saving account in different bank other than the one you do your daily banking with
He went so far with stories of people who managed to hide the money in a frame with a sealed glass where you have to crash it to get the money
2) Begin with the baby emergency fund plan
What I mean by baby is to deposit $500 as soon as possible
I would say to complete depositing your first $500 in your first week of starting your emergency fund
3) Automate saving into your emergency fund
This step works perfect for people who build emergency fund within their same bank along with their checking account
You setup an automatic transfer for small amount weekly or biweekly
Something that really builds up over time
4) Start multiple source of funding your emergency fund
Everyone of us can really liquidate $500 worth of household products or unused electronics into cash
- You can arrange a garage sales and take all of its profit to your emergency fund
- You can sell so many things around your home using Facebook Marketplace, Craigslist or even eBay
- Cut your expenses especially for discretionary items like the morning Coffee
I know you can mimic the purchase of you Coffee to every other day
To be fair, I am a Coffee addict so I know how we all spend on discretionary things
Since I noticed a surge in spending money on morning Coffee so I limited it to twice a week maximum
Follow the 101 money saving ways and check what you can save instantly and take its money to the emergency fund saving account
How long does it take to save for an emergency money
There is no specific timeline for you to take to complete saving for an emergency fund
To expedite the process of saving for an emergency fund, consider the following to help you focus on dedicating money to your emergency fund saving account
- Imagine you will be laid off in 3 months and act accordingly
- What about discovering a critical illness not covered by your medical insurance
- Imagine a severe dental pain then you discover that your dental plan does not cover that
I am not a jinx, on the other hand I am always positive but we as human beings don’t act to something unless we believe that it is going to happen
Think about COVID-19, it would have been quarantined if we had taken good measures when we noticed the first symptoms back in December, 2019 in Wuhan, China
Where does Dave Ramsey recommend to save your emergency money
For those of you who don’t know who is Dave Ramsey
Well, Dave Ramsey is an American personal money management expert and a popular radio show speaker with a multi million dollar company he owns and operates
He measures his success by the number of lives he very last minute managed to change and saved them out of debts
Dave Ramsey suggested where to keep an emergency fund
You should in invest your money in a money market account also called money market deposit account
The latter means any account that pays you the highest interest when you deposit your money
You should not invest your money in any risk account that can go down in value even if it promises high profits or any account that charges you penalty when you take the money out early like CD which stands for Certificate of Deposit in US or GIC which stands for Guaranteed Investment Certificate in Canada
What does Dave Ramsey say about emergency money
Dave Ramsey considers the process to build emergency fund as one of the essential part in the 7 baby steps towards financial freedom
You need that safety net between you and lifedave ramsey describing the emergency fund
You need an emergency fund, an old-fashioned Grandma’s rainy day fundwell I should be positive but I am positive, sure it is going to rain one day
It is human nature to want it and want it now; it is also a sign of immaturity. Being willing to delay pleasure for a greater result is a sign of maturitydave ramsey’s quote to encourage PEOPLE to save money
Pray like it all depends on God, but work like it all depends on you.for those who believe why we need emergency fund if we reply on god
Final notes on saving for emergencies
Finally I hope you realized the importance of saving money in case of emergencies
Check if you know how to build your family budget, this would definitely help you to plan for an item reserved for an emergency fund
I cannot push you to save money unless you have a vision and plan for your future
All I can do is to provide you with an emergency fund tracker free printable