Have you ever heard of Murphy’s Law? “If it can go wrong, it will.” We have all experienced this phenomenon I am sure. Financial emergencies can come in many forms. They can be as small as a flat tire or as large as losing a job. Just like we know that Christmas comes the same time every year, we should expect the “unexpected” and be prepared.
My wife and I were a single-car family for a while. We were saving money carpooling to work, when “unexpectedly” our old Honda had some major engine issues that needed immediate attention. Since this was our vehicle to and from work, the engine issues became an emergency. No work – No pay! Fortunately we had our emergency fund in place and could immediately take care of the issue without having to go into debt to do so.
“If you do the things you need to do when you need to do them, then someday you can do the things you want to do when you want to do them.” –Zig Ziglar
Bankrate.com recently polled Americans on their rainy day funds and found that almost a quarter, 24% have an adequate emergency savings fund, almost enough to cover six months worth of expenses. But at the other end of the spectrum you have the other 24% that have nothing, at all. In between, about 44% of Americans have something, but they’re not quite to that six-month expense threshold. And just to underscore the importance of emergency savings, there are over 6 million Americans that have been out of work for longer than 6 months.
How Much Money Should Be In A Fully Funded Emergency Fund?
Ask yourself, “What would it take for me to live for three to six months if I lost my income?” Your answer to that question is how much you should save. Use this money for emergencies only: incidents that would have a major impact on you and your family. Keep these savings in a money market account. Remember, this stash of money is not an investment; it is insurance you’re paying to yourself, a buffer between you and Murphy.
How Do I Start An Emergency Fund?
Creating a fully-funded emergency fund is actually the third step in the Seven Baby Steps that we teach in Financial Peace University and in personal coaching sessions.To get started you should walk through the first two steps before tackling the fully-funded emergency fund:
- Step 1 – $1,000 in an emergency fund. As quickly as possible put $1,000 in the bank. Cut unnecessary expenses, have a garage sale, etc.
- Step 2 – Pay off all debt except the house utilizing the “debt snowball.” Get intense about putting this debt to bed by cutting expenses, selling things you don’t need… and maybe even a part-time job. We will talk more in upcoming posts about debt and Baby Step 2.
Savings must become a priority if you want to beat debt, build wealth, and win with money. “In the house of the wise are stores of choice food and oil, but a foolish man devours all he has.” Proverbs 21:20 (NIV) In other words, wise people save money.
Questions: How would you handle a $5000 emergency if you were faced with it today? Would you be forced to use a credit card and increase your debt? You can leave a comment below.