Depending on how much you have, money can be a stressful or peaceful thing to think about. For most of America, it’s probably more on the stressful side of our brains. One thing we can do to alleviate some of the stress is to build an emergency fund. I believe everyone should have an emergency fund because life likes to throw us curve balls and you’ll be less likely to strike out if you have some money stashed away.
The topic of emergency funds is a simple one but according to a survey, 57% of Americans don’t even have $1,000 saved. Just one major emergency would be enough to make over half the country entirely broke. I don’t know about you but I like to worry about things as little as possible. I enjoy focusing on the happier things in life and wondering if I have enough money saved is not on my agenda. So when my wife and I got married, the emergency fund was one of the first financial moves we made.
How much should you set aside?
The amount of money you should have set aside for emergencies will depend on your monthly spending. It’s common practice to have at least 3-6 months of your monthly expenses saved. We currently live on about $2,700 a month (could cut back if needed) and have an emergency fund of about $8,500. This amount would cover us for a little over 3 months if we were to somehow lose all forms of income.
If you’re in debt then you probably shouldn’t set aside very much money until you get the debt paid off. Your debt itself is an emergency (especially if you’re paying interest) so any extra money you have needs to go to it. Thankfully my wife and I have never had to use our emergency fund but it would take a catastrophe the size of at least $10,000 to make us go in debt. Hopefully if you’re in debt you can hold off on the emergencies until you get them paid off and are able to save up.
Once you get to the point where you’re out of debt and have several thousand saved up, you’re ready to start doing some exciting things with your money. Since we don’t have to worry about debt or emergencies, I’m able to focus on earning more and investing our income. Life is just simpler when you eliminate worry as much as possible.
How to get beyond debt
So how exactly do you get out of debt and save an emergency fund? It’s a pretty simple formula, spend less and earn more. If you’ve cut back your spending as much as possible and still can’t save much money, it’s time to start side hustling. It’s easier than ever to make extra money on the side. I made an extra $1,000 this past month selling items on eBay and I’m currently looking into other interesting ways to make money and will share them in the future. The main thing you need to know is any extra money you make side hustling has to go to savings. Americans like to increase their spending as their income rises and this is a recipe for disaster.
Where should you put the money?
If you’re ready to start putting money aside, you should think about where to put your emergency fund. I’ve heard of people stashing actual cash in a hiding place and this is the last place I’d recommend putting your savings. The money could get stolen or destroyed in a fire or other natural disaster and all of it would be gone. The safest bet is probably to find an online savings account with a high earning interest rate and put your savings there. I’ve used Ally bank in the past and got an interest rate around 2% on my savings account.
I’m currently taking a risk with my emergency fund and have it in a 60% stock 40% bond Betterment account. I’m only investing my emergency fund as an experiment and don’t suggest you do the same. If I truly needed the amount of money in my emergency fund I have several things I could sell to get the money so I feel comfortable investing my emergency fund.
Some personal finance gurus suggest taking a line of credit out on your house and using that as an emergency fund but I don’t like using debt for anything other than purchasing a house. The argument is that you should invest every spare penny you have so that it can bring the highest interest rate possible. While this is a worthy notion, avoiding debt for anything other than a mortgage will keep life simple and interest free.
What’s considered an emergency?
We’ve talked about the importance of saving for emergencies, how to save for them and where to put the savings. What is actually considered an emergency? If you’re in the dead of winter and your hot water heater goes out, you’ll need to replace it as soon as possible so it’s considered an emergency. Basically any unforeseen accident or loss that has to be replaced can be considered an emergency. There are certain items that you should count on replacing after a certain amount of years and save accordingly. The roof of my house is going to need to be replaced in a couple of years and this won’t be an emergency if I go ahead and start saving for it now.
I hope this post inspires you to take action and start saving if you haven’t already. I’m really glad I was able to build an emergency fund early on in life and plan on having one forever. The more stress I can take out my finances, the better. Just remember you’re not allowed to spend the emergency fund on anything but emergencies.
I’ll update the post if something tragic happens with my emergency fund because of it being in the stock market. If all goes well, I could see some nice returns on it and actually use the fund to create more wealth.
Nathan created Millionaire Dojo to document his journey to reaching a million dollar net worth so that others may be inspired to follow the same path. He and his wife reached a net worth of one hundred thousand by the age of 25 and has been featured on Business Insider. His blog focuses on practical advice that can be implemented immediately in the form of saving money, earning more, and investing to create passive income.