Now more than ever having an emergency fund is crucial. Not only because we are facing uncertain times, but life is unpredictable. An accident, loss or a reduction in your of income can put you and your family in a dangerous position.
It only takes one bump in life to dismantle everything that you have worked. Believe me the road downhill is much is easier than uphill.
It is important to have an emergency fund in order to sustain yourself and your family until you can recover and get back on track.
I would have never imagined that I will be facing a global pandemic in my lifetime, as well as civil unrest. As I look at the events of today I realize how important it is to have an emergency fund.
My husband and I always agreed that saving for the future and having an emergency fund is more important than a dinner out, a fancy vacation or material things. It is not that we don’t desire for them, but sometimes we must make sacrifices in order to achieve our ultimate goal.
I’m not going to lie, building an emergency fund will require sacrifice and discipline, but remember these sacrifices are temporary.
You can prepare yourself and your family for any disaster by following the steps I laid out and sticking to it. I will show you how to build an emergency fund fast.
What is an emergency fund?
An emergency fund is money set aside for unexpected life events, not to be confused with savings.
These event can can be: loss or reduction of your income, a medical emergency, your house catching on fire, natural disaster, national emergency or pandemic. An emergency fund is critical to help you and your family to survive when faced with unexpected events.
What is the difference between an emergency fund vs savings?
The main difference between your emergency fund account and your savings accounts is liquidity. How quickly and easily do you have access to your money when there is a need?
What is an emergency fund?
Your emergency fund should be liquid, which means easily accessible when you have an emergency. Place your emergency fun in a basic savings account at your local bank. This will give you access to funds when needed and will earn some interest.
What is savings?
Savings is money set aside for either education, retirement, buying a home or just saving up for a big purchase. Savings accounts can be specialized.
There are specialized savings accounts, for example savings accounts for college, retirement and many others. You don’t want to use your retirement or kids college savings for an emergency.
These specialized saving accounts have stricter rules for withdrawing your money, can take weeks to get access to your funds, as well as penalties and fees for early withdraw and tax consequences.
How do you build an emergency fund fast?
How to build an emergency fund? By following these two simple steps you can start to build your emergency fund today.
By following these simple two steps, I was able to build out my emergency fund to over $6,720.00 within just one year, and over $33,500.00 in five the past years.
Step 1 – I want you get up and gather up all the change you have in your house, car, wallet or pocket and put it in jar. Now I want you do add $5.00 every day to that jar and all your unused change for the day.
Tip: If you can’t add $5.00 a day for your emergency jar, add as little as $1.00 and stick with it, and remember to add all your change. You will be surprised how fast it will add up.
Step 2 – Go to your bank and open a savings account. Have your bank set up an automatic withdraw from from your checking account to your savings account at minimum $150.00 a month, that is about $5.00 a day.
You can also read on my my post on Frugal Living in 2020 to help you save more.
How long should it take to build an emergency fund?
The sooner you start building that emergency fund the more prepared you will be if you are faced with an emergency. You can build your emergency fund in less than 60 days if you follow my steps.
Start by following my jar system, as well as opting to auto transfer a small weekly amount from your checking account to your emergency fund account.
Keep reading and I will share more ways on how to build an emergency fund fast.
What to pay first?
The reality for most of us is when we are faced with an emergency some bills might not get paid fully or at all. This is why building out your emergency fund sooner, rather than later is so important.
How do you determine which bills take priority?
When I created my emergency fund I made sure that it will cover my most important expenses that will help me survive. I created my tiers of survival, 3 tiers that break down your most important expenses to survie.
Tier 1
Shelter/housing: Secure your housing always first.
If you are renting talk to your landlord to see if you can lower or postpone your rent. If you have a mortgage, call your bank and ask about any programs they have that can assist customers during hardship.
Regardless if you can work out a deal or not, it is crucial that you secure your shelter, especially if you have a family.
Tip: Don’t forget to include your monthly utility bills in your housing emergency fund. Utilities include water, gas, electric, sewage and trash.
Food: Food, water and air, the basics of human survival.
It is a good think air is free. Make sure you budget for groceries and any basic neccessiteis you need.
If you have small children budget for diapers, wipes and formula.
Medical Insurance: Basic medical insurance to cover any unexpected medical issues.
I know that some experts wouldn’t put medical insurance as a priority. But it has been proven that stress can cause many health issues. A trip to the emergency room or hospital can be very expensive and can set your family back financially.
The least expensive health plan can save you thousands if you ever do end up in the hosptial.
Tip: There are several programs that can help you pay for or subsidies your health care costs.
Tier 2
Car: Having a vehicle can be expensive, the cost of insurance, maintenance, tags, and monthly payments can add up.
If you live in an area with good public transportation, take advantage of it. For others, like me, who live in the suburbs and have limited public transport having a vehicle is necessary.
Tip: If you don’t have access to public transportation, add your car expense in tier 1.
Taxes: You can’t outrun taxes, sadly. Don’t forget to budget for taxes, these include your income and property taxes.
Remember that your property taxes are secured debt, if you don’t pay they can put a tax lien your home. The same goes for your income, if you don’t pay the IRS can garnish wages and withhold tax returns to pay off the debt.
Tip: The IRS and your local tax assessors office will work with you on payment plans if you fall behind. But you must put money aside in your emergency fund for taxes to make minimum payments and show good faith in paying your tax debt off.
Tier 3
Credit Cards: If you can don’t fall behind on credit card payments. Making the minimum payment will save you a lot of fees and will not effect your credit score.
If you can’t make the minimum payments call your credit card company. They will work with you, often postponing payments for a given time or setting up a lower monthly payment.
Tip: Remember, credit card debt is unsecured payment.
Debt Collectors: Piranhas! If you are hit with an emergency, debt collectors should be the last on your list. The fact is the debt is in default and in collect already, you can’t do much beyond that.
If the debt in collection is government debt, such as a student loan, you will have to make arrangements to pay it off. Remember, every other debt in collections can be negotiated.
Tip: Consult a bankruptcy attorney to determine your options with it comes to debt in collections. Many bankruptcy attorneys offer free consultation.
How much money should you have in your emergency fund?
To determine how much you should have in your emergency fund you have to know the cost of living in your area.
While an $8,000 emergency fund would be sufficient to sustain a family in some parts of the country, in California where I live, it will not not go far.
Here is the basic formula you should follow to determine how to build your emergency fund?
Step 1: Calculate your tier 1 expenses monthly, then times that number by 6 months.
Note: Remember these are your most crucial expenses and are necessary for you and your families survival.
Step 2: Calculate your tier 2 and 3 expenses monthly and times that number by 6 months.
Note: These expenses shouldn’t be discounted and are equally important. However these expenses fall into a more flexible category as many companies are willing to work with you on payments and setting up payment plans.
Step 3: Add all these expenses together from tier 1, 2 and 3. This is the dollar amount you need to have in your emergency fund to survive for 6 months.
How do I start an emergency fund with no money?
Liquidate inventory: Start with liquidating your inventory. Look around your house and create a pile in your living room of stuff to sell. You can sell unused items online or have a garage sale.
Cut Discretionary expenses: Look at your subscriptions, streaming services, banking and service fees. You can often save $250 to $500 annually by cutting some of these services.
Also consider how many times you eat out or grab a cup of coffee. Eating out often can add up quickly. The average American eats out 6 times a week. Even if you just grab a cup of coffee for $5.00/5 times a week, you spend $1,200.00 a year just for coffee alone.
Reduce variable expenses: Your variable expenses include food, utilities, personal care, clothing and eating out.
These are expenses you have control over and how much is being spent. Look at your budget for each of these and see if you can reduce any variable expenses.
Take all your savings from your liquidated inventory, discretionary expenses and variable expenses and put it towards your emergency fund.
Tip: Every year you should take a close look at your discretionary and variable expenses and determine they can be reduced or eliminated.
Grow your income: In order to accelerate your emergency budget look into brining in more income by working extra hours or a side gig. Remember this is just temporary until you can build out your Tier 1 emergency fund.
Should I pay off my debt or build an emergency fund?
You should focus on building out your emergency fund first. You need to have an emergency fund to pay for housing, food, medical at the very bare minimum.
Your emergency fund should be built out for at least 6 months to cover your tier 1 and 2 categories at the very least.
CONCLUSION
How to build out your emergency fund?
- Create the jar system, contribute to it daily.
- Automate your contribution into your emergency fund, set up a weekly transfer from your checking to your emergency fund savings account.
- Liquidate all items, sell them online or hold a garage sale.
- Eliminate discretionary spending, subscriptions, streaming services, extended warranties, extra insurance, bank fees.
- Reduce variable expenses, create a budget for your groceries, personal care, clothing and eating out.
- Increase your income, find an opportunity that will bring in income immediately.
- Build out your tier 1, 2 and 3 expenses. Housing and food should always be your most important priority when considering your tier 1 expenses.
- Create an emergency fund for your tier 1 and 2 expenses for at least 4-6 months.
The Consumer Financial Protection Bureau has “An essential guide to building an emergency fund” Take a look at their recommendations.