All financial experts and most average consumers know that it’s smart to have an emergency fund of between three and six months’ worth of essential living expenses.
But even though we know this, studies have shown that more than 60% of Americans couldn’t easily come up with $400 cash if needed to cover something in short notice.
If you are in that majority who would be challenged to come up with a few hundred dollars in an emergency, don’t worry, but also don’t be complacent.
As a fee-only financial advisor and Ramsey-certified financial coach, I’m very familiar with the Total Money Makeover and Dave Ramsey’s Baby Steps. If you don’t know about the Baby Steps you can read all about it in the TMM book, or if you would prefer a more hands-on approach we can help explain and coach you through the process.
Baby Step #1 – A Starter Emergency Fund
Because so many people are in the situation described above, and the thought of waiting and saving a fully-funded 3-to-6 month emergency fund often feels overwhelming, the first recommended step for someone working to improve their financial situation is a starter emergency fund. This starter fund only needs to be $1,000 (or $500 if your income is $20,000 per year or less). The goal isn’t for this to take the place of the full emergency fund, but rather to help keep you on track and help avoid a financial crunch if an unexpected cash requirement comes up. Having $1,000 in the bank will allow someone to cover minor emergencies without taking on debt and without disrupting their bigger overall financial plan.
Where Should an Emergency Fund be Invested?
It shouldn’t! This isn’t an investment – think of it more like insurance. It is there – liquid and ready to be used – to help cover you in case of an unexpected financial burden. That’s what insurance does. It helps us deal with unforeseen events in a reasonable manner so it doesn’t put us in a bind.
So where should the emergency fund go? The best place is in a savings or money market account with your bank. Sure, the interest rate will be horrible, but again, this isn’t about growth but rather about peace-of-mind. I’d recommend there be a separate account to hold the emergency fund – not your normal checking or savings account. Putting the money in a separate account helps differentiate between that money and money you have available to spend on other parts of your financial plan.
When Can I Dig Into This Fund?
In an emergency of course! This is not a saving-to-buy-a-boat fund, nor a saving-to-go-on-vacation fund. There is nothing wrong with those types of funds (in fact, I’m strongly in favor of them!) but before saving for any other goal you need to take care of the emergency fund. Nothing but uncontrollable and unexpected expenses should come from this account. So when the car breaks down, or someone needs an unexpected doctor visit, or the air conditioner goes on the fritz (which is a serious emergency in the Southeast!). These types of expenses are exactly what the emergency fund is for.
Having the emergency fund fully-funded before starting on other financial steps (like debt reduction, saving for college or retirement, or working toward other goals) gives a nice buffer to let you keep momentum. If you skip this step and have an emergency, you’ll need to stop those other goals and likely lose progress on them. But with an emergency fund you just take the money out of there and then replenish it short-term – no need to tap into other savings accounts to cover the expense.
Where can I get the money for this emergency fund?
Sometimes reaching even the starter $1,000 amount – let alone a fully-funded 3-to-6 months amount – can be challenging. But you need to understand the importance and make this a priority. Many people have enough things laying around the house that are never used, that can be sold on EBay, Craigslist, or Amazon Trade-in (my favorite first place to check), to easily reach the starter fund amount. Another good idea is to go old-school and have a yard sale. That’s a great way to get the entire family involved and quickly move a lot of things, with minimal effort, in a single day. You might even be able to go way beyond the initial $1,000 just from selling a few things that you really won’t even miss.
Other ways to bring in easy cash
Aside from selling personal items, you can also consider additional income methods like part-time jobs (aka “side hustles”). A few of the popular side income options that I’ve heard from people as a financial coach are:
- Drive with Uber. How much you can make depends on where you live and how busy the area is, but almost everywhere you can make at least a few hundred dollars per week driving people around. Of course you need a car to do this, but most of us do have something to drive.
- Deliver pizzas. Sure, it may not be fancy but it is a great way to get extra income. Besides the normal pay you can also make quite a lot of money in tips. I know people who have easily added another $1,000 each month to their income by delivering pizzas a couple nights per week.
- Part-time shifts. There are plenty of places that remain open well into the evening that can offer opportunities for part-time work. One option specifically that someone recently told me about was UPS. Yes, the big brown trucks. Apparently they hire people to come in for a few hours in the evenings to help sort boxes and load/organize trucks. It sounds like they probably pay pretty well also.
Remember, these extra income efforts are only short term – they’re to help jump-start or accelerate your financial fitness program. Putting in work early allows you to have huge results later!
Peace of mind
Taking these steps and accepting short-term sacrifices can really help you experience peace of mind about your finances. For many people building up the emergency fund doesn’t take nearly as long as they expect at first – especially if you combine a few of the options above to help move along the progress.
Here’s a little musical inspiration for you – “I Need A Dollar”.
Catchy tune isn’t it?
If you want additional tips, or help building and executing a financial plan, let’s discuss how we can help you in your journey toward financial freedom. Contact us now and get your financial planning started. No time like the present to shift course and prepare yourself for a prosperous future.