The Power of an Emergency Fund
Most of my clients come to me with very little in savings. They have a lot of debt, spend every penny, and have no savings. Which is a sad state to be in. When we build the first budget, we realize there is no cushion between them and life, which is a problem.
Life is going to happen. What do I mean by “life”? Those pesky things that come up that can wreck our finances. Most people put these on “For emergency use only” credit cards. They can’t pay them off at the end of the month because they have no savings, and the emergency they had cost them more because of interest. The cycle continues, debt becomes overwhelming, and they don’t see a way out. Hence, this is where I come in.
The first thing we do when assessing their finances is to focus on a starter emergency fund. This E-fund, isn’t going to cover every emergency, it isn’t not meant for that. It’s to cover a flat tire, broken refrigerator, or a plumbing leak. We aim to have $1500-$2000 in this fund as fast as possible. (All coaches or money gurus have different amounts; I like a giant cushion when starting.)
Some people can do this in one day by putting it in an account. Some people spend time building this because they don’t have a lot of wiggle room in the budget. There is no correct time frame; just as fast as possible for you.
Later, when the debt is paid down, we will add to this again, building several months’ paychecks. Let’s face it: if you get laid off, you will want to keep your internet to look for another job. If you do your main expenses only, you’ve got to give up a lot of stuff, and your emotional state may not be the best.
So, several months of paychecks are saved up; at this point, you are protected from experiencing life without credit cards. Your emergency cost is the amount quoted, and no more because you aren’t using credit cards to save you from disaster.
I know what you’re thinking: another person is against credit cards. I’m not; I use mine all the time. I’m against using them for emergencies because most people don’t have the money to pay them off at the end of the billing cycle. If you don’t, it adds interest. And have you seen the interest on credit cards? Oh my word, it is astounding what the rates are, anywhere from 16-29%, depending on your credit score.
Anyway, we need somewhere to put this large sum of money. I use a High Yield Savings account online. It gets me a little bit of interest, not a lot, but better than the brick-and-mortar bank down the street. The other benefit of putting it is there; it takes several days to get the money. Which prevents me from just spending it on whatever I want. I have to think, is this an emergency that I NEED this money?
And I’m guessing you think that is too large of an amount to put into savings. I felt so, too, but my husband got laid off from his state DOT job. We were thankful to have that fund because while he was laid off, we found a hole in our subfloor in the master bathroom that had to be repaired. The cost of the repair was around $15,000. We did most of the work. It was a master bath, and bathrooms were expensive to remodel.
Anyway, back to that layoff, which they told him would be several months, he would be back in the spring; it turned into over a year. We have other income, thank God, so we stayed afloat without much more damage to the emergency fund other than the remodel. He was laid off in November 2019 and called back in March 2021. It was a long time, and having the peace of mind that we were financially able to stay afloat was a blessing. (I hate to think of how my anxiety would have behaved if we didn’t.)
Life happened. We were prepared, and I want you to be ready, too. Start small, $1,500-$2,000. Once you hit that milestone, celebrate. (It’s a good dopamine hit.) Then, start working on your debts. Once those are manageable, start building your large emergency fund again.
What happens if you use it? You rebuild it to the $1,500-$2,000 range again as fast as possible. So life doesn’t attack again.
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