Today, I’m going to be talking about an ‘Emergency Fund’ and why you should have had one yesterday. These personal finance tips will get you on the right track.
What is an Emergency Fund?
An Emergency Fund is exactly what it sounds like. An emergency fund is a bank account with money set aside to cover large, unexpected expenses.
These unexpected expenses could be:
- Unforeseen medical expenses
- Home Repairs
- Appliance Repairs or Replacement
- Car Repairs
Basically, it’s to cover crappy shit that you didn’t expect to happen. An emergency fund is important to have so you don’t have to go further into debt to cover an unexpected expense….
This is NOT your Spring Break Holiday Fund. Don’t touch that money, Sis.
Can’t my Emergency Fund be a Credit Card?
Absolutely not. Credit Card companies are exceptionally sneaky and when times are tough, they are counting on you missing a payment so they can start racking up profits in interest charges.
If you can’t immediately cover an emergency expense of $1000 or less, chances are you STILL can’t afford that payment 30 days later.
Your Emergency Fund should be ‘liquid,’ or easily accessible bank account. You should be able to access that money TODAY, right now, and immediately.
Having someone ‘owe’ you $1000 and thinking that they could ‘pay you whenever’ is not the same as having an Emergency Fund.
It needs to be separate from all of your other money and you need to be able to access it immediately.
Check out this video I made to explain Emergency Funds in more depth:
If you’re just starting out on your journey, check out my Beginner’s Budget Dashboard.
It’s a Google Sheets template that tracks your expenses, income, investments, savings, and more! There’s even a free video tutorial to help you get started.
How much should you have in your Emergency Fund?
An absolute IDEAL situation is to have 3 – 6 months of expenses in your Emergency Fund. (crickets). You heard me right. 3 – 6 months.
But for anyone just starting their financial journey, a good place to start is with $1000 in your Emergency Fund. A nice, round sexy number.
$1000 will cover most appliance replacements, minor car repairs, and some emergency medical expenses. Great work!
But as we’ve learned with COVID-19, $1000 won’t get you far if you suddenly find yourself unemployed with the world economy on the brink of recession.
Emergency Fund Recommendations
That’s why I would recommend an emergency fund of 3 – 6 months of critical expenses. When I say ‘expenses,’ I mean rent, utilities, food, and anything else you literally can’t live without. This is a ‘Bare-Bones Budget.’
Critical expenses do not include make-up, Netflix, or anything else that’s ‘non-vital’ to staying alive. However, this is the ‘worst case scenario’ so try not to be scared off completely.
The idea is simple, limit any non-essential spending until you get back up on your feet. This is in your best interest so try not to consider it to be a punishment so much as a personal challenge.
If you’re dead broke and unemployed, those Mink eyelash fillers aren’t going to do you much good anyways…
Calculating Monthly Expenses
Here’s how I would calculate my Bare-Bones Budget or monthly expenses.
Here’s an example of ‘critical expenses:’
- Rent = $1000
- Utilities = $50
- Phone bill = $50
- Food budget = $400
… then my monthly expenses are $1500. These are the bills I need to pay to keep the roof over my head and the lights on. Also, girl’s gotta eat.
I consciously excluded transport and monthly subscriptions because these are non-essential expenses if I’m unemployed and not going anywhere anytime soon.
There’s some flexibility with my food budget, but I genuinely need my phone and wifi to find new job opportunities and to stay SANE.
So if $1500 is my monthly ‘barebones’ budget, then 6 months of barebones expenses equal $9,000.
That means I should have $9,000 in my Emergency Fund in order to sustain 6 months of ‘fun-employment’ before I have to move in with my parents.
Does that make sense? If not, drop a question below in the comments section and I’ll get back to you with an answer.