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Let’s face it, life is full of unexpected situations and unless you are very lucky, you will always worries about what kind of unpleasant surprises tomorrow has in stock for you. The first step on the path to Financial Security is having a emergency fund, a money reserve that you can draw upon when Shit Hits The Fan.
The Basics of an Emergency fund
In this day and age, it can be very hard to save the money to establish an emergency fund when you are already cash strapped. Although you might think, like a good portion or american, that the probability of an unexpected situation is very low (in 2018,
39% of all Americans have less then a 1000$ in their checking and saving account combined).
The fact is that an emergency is a situation that you did not plan. And it can happen to you, not always to others! When this emergency happens, and you have no money to pay for it, you will have to rely on a loan, or worse, a credit card.
Depending on a loan will increase your stress level during this already stressful situation. This debt burden will also push back the date where you can reach Financial Freedom. What more, the actual time it would take to erase that debt will be greater then the time it would have taken to replenish an emergency fund due to the interests.
As such, the emergency fund is there to protect you and your family. Again, you don’t need an additional burden, another monthly payment, when the dust has settle after the emergency.
Not To Be Used For
An emergency fund is a money stash. True that it’s money that you own. However, it shouldn’t be used for expected or planned situation.
Here are some situation in which case you should not use your emergency fund:
- Christmas gifts!
Christmas is not an emergency situation, it’s on December 24th every single year. It’s an expected situation! - Pay for car irregular maintenance. It should be planned in your budget, a small amount saved each month.
- Pay for medication;
- Pay for insurance;
- Pay for any monthly bill; and
- Anything not significant and unexpected.
You need to keep that stash of money for situation that punches you in the face!
Here’s an real life situation that happened to us.
November, a cold month here in Canada, our central heating system died on us… The repair guy bluntly told us that we needed to change it, no repair possible.
Luckily, the emergency fund kicked in! A few thousand dollars later, a new central heater/heat pump was installed and the temperature went back to normal.
Think of your emergency fund as a safety net, it’s there to save you in the worst case scenario.
The Size of the Safety Net
The size of the safety net
This is not an easy question, how much money do I need in my emergency fund?
If you don’t even have one, I suggest that you give yourself a smaller target. A stash of between 500 to 1000$ should get you through most of the smaller emergency situation life will throw at you.
Once you got this base covered, you need to move to a longer, sustainable target. There are some general rules:
Stable employment
If you have a stable job, or household with 2 working adults or in a high demand career, your target is to have enough money to cover your income for 3 months.
Note:
The average time to find a new job in a healthy market is 2 months. However, if you get laid off, the market might not be stable nor healthy.
Single income household
6 month of income should be your target.
The ultimate target
If your finance are really healthy, or your job is highly unstable or you know you will have difficulty finding work, you could target a full year of income. True that it’s potentially overkill but you will be covered for pretty much anything that life will throw at you and will give you time to get back on your feet.
Don’t forget, you will not reach your target overnight, it will take time. You just need to stay focused. However, this safety net is there to remove some stress of the equation when you have an already stressful situation to manage. Not thinking about where to find money will help you concentrate on the tasks at hand.
The Debt Dilemma
Putting money aside for an emergency fund, not really making you any kind of money, instead of paying debt might be counter intuitive. However, it might lower your potential debt burden.
Consider this fictitious situation:
You need to take an unplanned week (or more) off to take care of your sick kid (or significant other). For that one or more week, your income is: Nil.
If you don’t have an emergency fund, you are likely to rely on your credit (card or loan) to get through those days/weeks/months.
This will only increase your debt burden.
On the other side, if you have an emergency fund ready, you will use it in this situation. Your debt level will not increase, you will not pay any extra interest and you will still be on the path of debt freedom!
High digit debt
You have a high interest loan or a loaded credit card? Try to bring your emergency fund to at a bare minimum of 1000$.
Once achieved, you can pay your dept as fast as you can.
Low digit debt
You have a low interest debt, such as mortgage or car loan? My suggestion would be to reach the 3 months level emergency fund. Once achieved, you can pay your debt.
Associated Post: Tips and Tricks to save thousands of dollars each year
The Income Streams
You are cash strapped and you don’t know where you can find money to fill up your emergency fund? Here are some ways for you to get some extra money:
- Lower your spending. We are spending a huge amount of money on stuff that we don’t necessarily need, Expensive lattes and snacks for example. You could be saving hundred or thousands of dollars each year by following some guidelines.
- Cashback. A lot of people find this idea ridiculous. However, having a small percentage of each of your transaction getting back in your pockets might give you a few hundred dollars each year. Which really helps in the case you are cash strapped!
- Online Side hustle. There are plenty of ways to make a little extra money online, mostly in your spare time. Here is a list of tried and true options or a list of Passive Income to set up.
- Setting up a blog
There are plenty of side hustle you can find.
However, one of the most rewarding and the one having a really lucrative potential is setting up a blog. It’s not always easy, you need to invest some time, but you don’t need a lot of money to start it!
I have set up a great guide to help you!
If you don’t need help and want to get started live, I suggest that you start by going to Bluehost for some nice hosting deals! Their team is really awesome and it comes with a free one click installation of WordPress, the most used blogging platform in the world! Just give it a try! It cost less than a coffee PER MONTH!
Associated Post: Extra Money Making Ideas to make 100$ in your free time
Where to Store your Safety Net
Where to keep your Emergency Fund. There are a few rules you need to follow. If your Emergency Funds hard saves dollars are in the same checking account you use daily, you will use it for non emergency, that is a certainty. Even if you promise yourself that you will replenish it with the next paycheck, you won’t… However, this fund needs to be easily accessible, you need to be able to access it rapidly in case of emergency.
What is recommend is keeping your fund in high-interest savings account. An high-interest saving account will ensure that your money is secure (risk-free) and liquid (quickly and easily accessible). I recommend using an online savings accounts to those offered by traditional brick and mortar banks as the interest rates offered are, normally, significantly higher.
United-State
A very nice online high-yield savings account is offered by CIT Bank.
Its Premier High-Yield Savings Account currently offers a 1.55% APY with no maintenance fees or ongoing balance requirements.
Or the 2.25% APY Saving builder, with an increasing interest rate as you save!
Its accounts are also FDIC insured, it offers great interest rates, and the setup process takes just minutes. However, it doesn’t have a regular checking account option available, so it isn’t a good option for someone looking for a day-to-day bank.
Canada
For Canadians, the best is probably the saving account offered by Tangerine. It often offers up to 2,5% APY on new money transfer! If register for a new account with my Orange Key 48396560S1 and you will get a 50$ gift!
Its accounts are CDIC insured, it offers great interest rates, have no fees, and the setup process takes just minutes. Also, it does offers a No Fee regular checking account option, so it it’s also a good option for someone looking for a day-to-day bank.
While no savings account will make you rich, the interest rate should help your money keep up with inflation and it’s always better to have a small interest rate then nothing. By keeping money at your place, under your bed or in the freezer, might be dangerous in case of emergency, if you need to evacuate you will want to take it, placing you under extra risk. Also, this money will not work for you!
Mathematically, you will loose buying power as the inflation will keep prices of good increasing while the amount of money stays the same.
Should you Invest your Emergency fund?
Simple answer.
NO
Never ever think of investing this fund!
All investment have some kind of risk. Be it mutual funds, shares, ETF… and most of them are not really liquid, it might take time to be able to access your asset.
Yes the interest/potential gain might look interesting. But it’s fund to be used in emergency, you do not want to be out of luck with your investment and in your life at the same time! It has the potential to become a safety net with big holes in it, very dangerous. This emergency fund is there to protect you and your loved one in dire circumstances, you do not wan’t any risky endeavor to intervene in case of emergency.
Starting Your Emergency Fund Now!
Having an emergency fund is a fundamental tenant of a financial freedom and financial security. It protects not only yourself but also your family!
It can keep you out of debt, and will reduces stress in case of an emergency.
You don’t have an emergency fund today? Its’ ok… But now, it is time to start saving into this Saving account to make sure that you have one near term! Set a new line in your budget, determine how much you need to give you peace of mind, and start to save. You will give yourself a pat on the shoulder if you ever need it.
What are your Emergency Fund plan? Any other Ideas?
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