Life is what happens while you’re busy making other plans.
– John Lennon in the song Beautiful Boy (Darling Boy)
It never fails; the very moment when you think you’re on a roll and you might have a little extra cash left over for something crazy and fun, the unexpected happens. Your transmission went or you need new tires, your spouse or partner was laid off at their job, your son’s asthma medication is suddenly no longer covered by your insurance, your or your spouse become seriously ill and are rushed off to hospital and are unable to work, you need expensive dental work, your laptop suddenly dies and you can’t work until you’ve replaced it…. the list goes on.
Yes, all of those examples have happened to me at some point over the past 10 years. I learned the hard way that I needed an emergency fund. For a long time we were just living paycheck-to-paycheck and having any kind of savings seemed completely impossible. Some days it still impossible, but I’ve managed to save small chunks here and there so that we have at least a little bit set aside in case the universe throws us a crazy curve ball.
No matter what curve you end up with, there is a way to keep your sanity when the bills start to roll in – start an emergency fund.
How Much Do You Want to Save?
This is the first step in beginning any emergency fund. The standard requirements for an emergency fund are six months of your gross salary or income. This can be your starting goal.
Figure Out Your Expenses First
Take your entire household income for a month, don’t forget any additional incomes sources such as rentals or interest from investments you may have. This is what you have to work with. The popular rule of thumb is to take 10% of that total income number as what should be saved each month towards your emergency fund.
Believe me, I know sometimes 10% is not possible. I suggest taking whatever amount you can each month and putting it into your emergency fund. Often times I’ll replace something I “want” like an extra latte at Starbucks and just transfer that money to my emergency fund instead. Sure, it’s probably less $10, but it’s something and it’s a good place to start.
Calculate Your Expenses
Create an expense log and track a full month of all expenses. This includes routine bills, such as groceries, electricity, gas, and phone, to your variable expenditures, such as credit cards, household items, and personal hygiene products. This creates a realistic view of what you will need saved in the event of an emergency. Remember, our goal is to grow the emergency fund to the point where it covers six months worth of our expenses.
Pay yourself as if you were a utility bill. your calculations of your expenditures, you want to include 10 percent of your income as a payment to yourself. Make this a standing expenditure. You can set this up as an automatic deposit so that you don’t even see the money. This will force you to make that payment, instead of waiting until the end.
Income Minus Expenses
Take your income, minus your expenses, and that is what you have left over each month for additional savings. Take part of this money and deposit it into your emergency fund before you are tempted to spend it on something else.
This is where careful attention to expenditures can be considered. In order to maintain an adequate emergency fund, non-essential expenditures can be re-evaluated for importance. If these expenditures can be cut, that is more money that can be placed into your emergency fund.
Open a Special Savings Account
Open a separate savings account that is just for your emergency fund. This fund is not to be touched, unless it is for an emergency. It is essential that this fund always remain at the minimum of six months gross salary and can cover six months of your expenditures. This account should be one that is easily accessible in an emergency.
Having a separate account is what really helped me with this side of our finances. I never look at the account other than to add money to it. I keep the paperwork for it stashed away so I’m tempted to use it for anything that is a non-emergency. We’ve had a few things come up recently, so it’s not looking very plump, but it’s there if we need it and it grows little by little (sometimes just $5 at a time)
Replenish the Fund if You Use It!
Silly me, I really learned this the hard way after my husband was in the hospital a few years ago. I thought to myself, “We’re good for awhile, nothing crazy is likely to happen right now.” Right? WRONG.
If you’ve used up a good portion of your emergency fund to cover an expense make sure you start replenishing that fund as soon as you can. Even if it’s just $5 here and $2 there, all those little bits add up faster than you might expect them to.