Building An Emergency Fund
By Brittany Charles
Of Mrs.Fiscally Responsible
“If you want true financial peace and security, then you must have an emergency fund.”
I’m sure by now, the global COVID-19 pandemic has surely proven the significance of having an emergency fund. An emergency fund is money and/or assets set aside as a safety net for unforeseen and unexpected expenses, so you don’t have to go into debt & can have a level of financial peace and security.
While an emergency fund is designed to replace you income incase of a job loss, it is also important to remember it’s also commonly utilised for its very nature: an “emergency”. A situation where you need to use it for an unexpected expense. There’s nothing like the nuisance of an unexpected expense, such as a flat tire or a household item breaking down. With an emergency fund, you’ll have the peace of mind knowing that you can use it, rather than resorting to a credit card that can easily put you into debt. Note that an emergency fund should be used for emergencies ONLY & not for “non-emergencies” such as a summer vacation or a pair of designer shoes.
Everyone’s emergency fund will look different because everyone’s finances are personal. It's important to remember and establish your emergency fund based on your specific life. You should factor in your marital status and/or children because those factors account for the amount in your emergency fund.
Your emergency fund should cover your living expenses (not necessarily replace your income). If you have a monthly income of $3,000 but your living expenses are $2,000 per month , then you should calculate your 1 month emergency fund to be $2,000 and not $3,000. Oftentimes people become overwhelmed by the thought of their emergency fund simply because they overestimate it. In addition, you also should factor that your “living expenses usually reduce if/when you go into an emergency mode and rely on those funds. Chances are, if you’re budgeting for entertainment under normal circumstances, then naturally you won’t be budgeting for much/any entertainment if you’re living on your emergency fund.
Savings goals are always more attainable when you plan them out in alignment to your income. The best way to start building an emergency fund is by saving a portion of your paycheck, my ideal amount to save is 10% or more of your income until you reach your savings goals.
My biggest tip is for you to break down your Emergency Fund Savings goals into the following 4 baby steps:
For starters, your 1st Goal should be at least $1,000.
1 month of your living expenses
3 months of your living expenses
6 months of your living expenses or your level of comfort
Also, always remember it's okay to refill your Emergency Fund and add to it as life changes.
It's wise for your Emergency Fund to be separate from your checking & any other savings accounts. It must be reserved for emergencies only, yet accessible. Furthermore, I recommend keeping your funds in a High Yield Savings Account( HYSA) as it will provide you with a higher interest rate than a traditional savings account and it will still be accessible.
I’m a Financial Coach, Wife & Mom. I became Debt-Free & built a 4 month Emergency Fund in 2018 after paying off $39,000 of debt in 8 months. At the start of the COVID-19 global pandemic, I doubled my Emergency Fund to 8 months in less than 60 days. I teach and empower women to end the paycheck to paycheck cycle, become debt-free & build wealth. Follow and connect with me on Instagram @mrs.fiscallyresponsible, I provide personal finance tips & share my financial journey.
Follow on Instagram: @mrs.fiscallyresponsible