What's in the Bank: 4 easy ways to save for an emergency fundMar 06, 2021
What's in the Bank
In the United States, only 1 in 4 families are prepared for an emergency over $400. Now, let's think about that in the context of our current circumstances. We are in the middle of a global pandemic, unemployment is at the highest rates it has been since the great depression, and financially families are struggling.
So, with that in mind, let's talk about what's in the bank. Every family should have a fully-funded emergency fund of 6 to 9 months of living expenses. Many experts will tell you that anywhere from 3 to 6 months of reserves is sufficient, depending upon how secure your household income is. Based on our current circumstances, it is clear that it is even more important to be prepared for the unexpected. Jobs that felt secure in 2019 no longer do. Your 6 to 9 months emergency fund should live in an interest-bearing account that you can access in the case of a real emergency. Now we believe that you should have a fully-funded emergency fund if you are out of consumer debt, not including your mortgage. If you are still in debt, you must work to get yourself out of debt as quickly as possible. With that in mind, I recommend a $1000 starter emergency fund for an individual, $2,000 for a couple, and $3,000 for a family with children. If it doesn't sound like it's enough, it's not. The point is to make things so uncomfortable that you will push harder to get out of debt. So, let's talk a little bit about how we get there.
Step 1: The Budget
This is probably the most difficult part of the process. Everyone needs to have a budget. It doesn't matter if you are a millionaire or you are living paycheck to paycheck. It is vital to your financial success that you have a pulse on your money. If you go to the M3 website, you will find several resources, and when it comes to FIRE (Financial Independence Retire Early). We will also provide a budgeting tool for free. Your monthly budget must be completed every single month. You will also need to check in with it at least weekly. It is important to note that failure is part of the process, the first 3 months of maintaining a budget is the absolute hardest. You will struggle, make mistakes, and realize that you are spending a lot more money than you thought you were. Stay the course just like with exercise; you need to build muscle memory and practice to see results.
Step 2: Stop Paying Extra
Until you have saved your emergency fund, stop paying extra on your other debts. One of the things that I notice about people currently in debt is that most don't have a real strategy for paying it. Maybe they will pay a little extra here or there, or maybe they pay the minimums. The fact of the matter is you need a financial buffer in case of the unexpected.
Step 3: Minimize the Budget
There has been a movement towards minimalism over the past few years. The desire to have less excess and live life enjoying the time you have here with mindfulness appeals to many people. Taking a minimalistic approach to your budget can also help work towards funding your emergency fund.
Once you have a budget in place, you will notice that you spend a lot of money that goes unaccounted for. The world is so connected it is almost too easy to replace or buy an item. Review your budget for subscriptions, Amazon purchases, restaurants, games, or any other luxury purchases. Look back on your purchase history and really consider, did you need that item, are you actively using it, was there a way to get that item for a lower cost or free?
This is the opportunity where you can go through your home, look for all the excess, and perhaps have a
yard sale. Facebook Marketplace and other online yard sale sites are great tools to sell off items around the house you no longer need. Reselling is a fantastic option that allows you one downsize a bit, make sure you only have the things you need, and help you leave a more sustainable footprint.
Now, not everyone will find that they have much money left when they pared down their budget, which leads us to step number 4.
Step 4: Increase your Cash Flow
At this point, you have a functional budget, and you have sold what you can. Unfortunately, when you look at the bottom number, you are barely breaking even. What do you do next? It is a sobering feeling when you look at the budget and realize that you either do not have what you need to pay all of your bills. You need to increase the amount of money you bring in each month. There are so many options when it comes to increasing your cash flow. The most obvious option is taking up a second job, but many people do not have the opportunity to work scheduled hours on top of their traditional employment. That is why we are a big proponent of the gig community.
Some people have natural talents and are crafty, allowing them to use those talents to build their own business selling things on Esty or other websites. Uber, Uber Eats, Lyft, Doordash, and Instacart are all fantastic options that allow you to bring in income on your own time frame. We have worked with individuals who have brought in $1000 a week on top of their traditional income driving for Uber eats. A $1000 a week can make a huge impact on your ability to pay down debt. One thing to keep in mind when you work for a gig community or you work for yourself is that taxes will not be taken out or your income. Work with a qualified tax professional who can help you navigate your taxes. Also, it is essential to put aside at least 25% of your income and be prepared to pay taxes.
It may feel like a $1000 emergency fund is not enough, and the honest answer is, it is not. A $1000 will help take care of most of these short-term unexpected expenses. Even as you navigate paying off debt, it is vital to put money aside each month of expected large expenses. Putting snow tires on your car is not an emergency; Christmas is not an emergency. Sink funds are vital to your success both at paying off debt and at staying out of debt. Once you are without debt minus your house, it is time that you really dig in and save 6 to 9 months of living expenses.
You don't have to do this alone. Schedule a Discovery Call today to see how we can help you on the road to Financial Freedom.
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