I don’t think you need me to bring this undeniable fact to your attention. Instead, let’s focus on what happens next. All you can do is keep your composure, deal with the situation at hand, and move on. That’s what “real” adults do (or so I’m told).
I try to remind myself of this all the time. Sometime it works, and sometimes I’m melting down at the airport because I’m sleep deprived, about to miss my flight, and thinking that the TSA security line is really just a personal attack on me and my schedule. #Adulting
“Stuff happens” moments test our nerves and resolve, but they can also come with real financial consequences. These moments are almost always unexpected and require you to take action right away — a missed flight requires a rebooked flight, a trip to the ER ends with a hefty medical bill that needs to be paid within 30 days, and a layoff means figuring out how to pay your rent while you job hunt.
This is where having an emergency fund comes in. This cash cushion can mean the difference between handling a setback with grace or dealing with a financial catastrophe. Without an emergency fund, you may find yourself making big sacrifices, falling back on a credit card, or making a dreaded phone call to family or friends for help. Instead, set some cash aside that can be tapped when shit happens (because it will).
How much do I really need to save?
Start small. Choose a number you can feasibly reach within 3 months of diligent saving. $500-1,000 is a nice jumping off point for many people but start with a number that works for you. Whatever that number, break it down into a weekly savings goal so it feels manageable. For example, if you aim to save $42 a week, you’ll have $500 by the end of 3 months.
Once you’ve hit that goal, keep saving until you have enough to cover two or three months of your spending. This number is usually enough to cover an unexpected home or auto repair but can also pay the bills if you lose your job. You can always choose to save more if you’d like to be more conservative or if you have a lot of uncertainty in your financial situation (say you’re a freelancer with lumpy income).
Where should I keep it?
Open a separate savings account specifically for your emergency fund dollars. This can be done at your current bank where funds can easily be transferred to your checking account in the event that you need them.
This convenience is great in a pinch, but it can also be tempting to spend. If you feel like you’d be likely to drain the funds, consider opening an account at a separate bank. A transfer from an online bank, may take a couple of days and this small barrier may be just enough to keep you from raiding your funds. These accounts also typically offer higher interest rates than brick and mortar banks, which is a nice bonus.
Where is this savings supposed to come from?
Take a hard look at your spending for the last month by logging into your credit card or bank account online and scanning your transactions. Identify a few areas where you could cut back or cut things out all together. Be specific! If you tend to get coffee 5 days a week while at work, vow to cut this down to three. If you’re still paying for a monthly gym membership you never use, cancel it. Once you know where the emergency savings is coming from, don’t settle for mental accounting. Take the extra step to actually transfer the cash to your new account.
What if I have debt?
Always pay the minimum on your debt each month. This keeps you current, helps you avoid extra fees and builds your credit score. Beyond that, it can be tempting to put any extra cash towards paying down debt, rather than letting it sit in some savings account.
But consider this scenario. You put every last dollar you have towards paying down your student loans that have a 7% interest rate. You’re feeling good until you hit a bump in the road, literally. You need some cash for a car repair and you need to get to work the next day. You don’t have any cash saved so you end up putting the cost of the repair on a credit card with an 18% interest rate. You’ve just traded one type of debt for a much more expensive variety.
If you have high interest rate debt (meaning debt with an interest rate in the double digits), aim to save a minimum emergency fund of $500. Once you have this cushion to cover the smaller “shit happens” moments, use your extra cash to pay more towards your debt above the minimum payment. Once the high interest debt is paid, pick up your saving where you left off.
Planning for the worst isn’t fun but with an emergency fund in place, life will throw curveballs at you, you’ll deal with it and move on. Suddenly, all those shit happens moments won’t feel quite so urgent after all.
Talk about adulting.
Photo by Zhen Hu