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You need an emergency fund, everyone does.
It helps provide security in case something happens to your income sources. And it makes dealing with hard things a little easier.
Image this your dog is sick so you race him to the vet. The vest is able to help your dog but it comes with a large price tag.
When you come out of her office you see somebody has hit your car. That is going to be another big bill.
Now for a lot of people these scenarios are scary not just for the bad things happening to them but also because they can’t afford any of it.
They worry and get anxious because they don’t know how they’re going to pay those bills.
Now imagine for a second that you have the money. You know that emergencies happen and you planned for it with an emergency fund.
While it still sucks you’re not stressed because you do have the money. Instead, you can devote some extra time to spend with your fur baby as she recovers.
Why you need an emergency fund
Even though emergency fund can provide comfort and security in a bad situation most people don’t have one. In fact, the average American wouldn’t be able to pay for a $1000 emergency
The scary thing about that is when people don’t have an emergency fund they often end up borrowing the money to pay for it.
Which only puts them further behind and in a worst place if another emergency comes up.
Now emergency funds aren’t just for when bad things happen to you. You can also use it to get out of bad situations.
Like a job where people treat you like shit. Or maybe you have a bad living situation. An emergency fund can help give you some time to figure things out.
There are lots of ways you can use your emergency fund. Just remember it for emergencies only.
Don’t use it for fun things you want. And still try to plan for those large annual expenses.
How to prepare financially for emergencies
You need an emergency fund now it just a question of how much. In an ideal world, you would have an emergency fund of about 3-6 months worth of expenses.
If you’re just starting out with managing your money that can seem like a crazy amount of money.
The good news is you don’t need to save that much right away. There are a couple of steps beginners can take to prepare for emergencies without needing to have that much saved.
Break paycheck to paycheck cycle
The first step is to stop living paycheck to paycheck.
In a nutshell, this means that what you’re making today go towards next month expenses. And what you’re spending today is from last month paycheck.
Now this does a couple of things. First, it takes you out of immediate crisis mode. And provide a bit of a buffer. Since you living on last month paycheck you have a bit more time to react.
For those who have income that fluctuates from month to month, this can help make it less of rollercoaster and smooth things out.
If you make lots one month you simply fund the next couple of months with it. So when you’re next paycheck is smaller again. It’s not a big deal you’re not even going to spend that money for a few months.
Plus if you need to, you can also take some money out of next month. It gives you time to react and to plan for things. Not everything has to be a crisis.
This article here can help you break the paycheck to paycheck cycle.
If you broke the cycle and now are a month ahead. Congratulations that’s a huge step to take you’re doing great.
Save $1000 for emergencies
The next step to take with building up an emergency fund is to save a $1000.
This might seem like a huge amount for some people and might be hard to think of how you’re going to save that much. Once you start breaking down that amounts into smaller chunks it becomes a lot more doable.
Saving $1000 over a year would mean you need to save about $20 a week or $80 a month.
If you want to sae $1000 in six months you would need to save about $42 doll a week or $167 a month.
If you want to save $1000 in three months you would need to save about $83 a week and $333 a month.
If you want to save $1000 in a month you would need to save about $250 a week and $1000 a month.
Hopefully, this helps make it seem more achievable to save a $1000. Now, most of don’t just have extra money laying around. But if you could cut your spending by $20 each week it would take a year to save a $1000 emergency fund.
Once you have a thousand dollars saved up it time to work on the 3-6 months of expenses emergency fund.
Build a 3-6 month emergency fund
I’m not going to lie. This one scares me about when I was building up my emergency fund. It seem like such a big number.
But here something that took me awhile to realize when they say 3-6 month they mean expenses not income.
So I want you to think of all the money you spend each month that you have to spend. Things like rent, gas money, utility bills, your phone bill. Things that you can’t do without.
The add up all those things and times it by 3 that you your 3 month emergency fund. Times it by 6 that your 6 month emergency fund.
Now that number should be smaller than saving 3-6 months of your income.
It might seem impossible to save that much but you have a head start this time. You already save a $1000 you can put towards your 3 month emergency fund.
Save for the 3 month emergency fund first Then once you hit that number. You can save for the 6 month emergency fund.
Why you don’t need a “big” emergency fund
Now some people, when they figure out with expenses how much to save, might think that number small. After all, their income is higher.
But here something to remember
The better you get with your money and planning ahead the last true emergencies there will be. Let’s go back to our opening example here.
Let’s say you’re doing great with money. You have an emergency fund that all ready to go but you also have some other funds.
Your dog is getting old so his vet costs are probably going to go up and you start saving for them while ago. Your dog is healthy now but you want to be prepared as he ages.
You are also thinking about a new vehicle. Now you’re planning on paying for it in cash so you have been saving in your car fund for quite some time now.
And when everything goes wrong on one day you have it cover without even needing to touch your emergency fund. Because to you, these aren’t emergency these are things you planned for a long time ago.
How to save money
Now it easy to say save this much money but how do you actually save money?
There are a couple of tips and tricks I’ll show you that will help you to save money.
But before you start saving money you want to make sure you are living within your means. That you aren’t spending more money then you’re making.
If you’re are spending more then you’re making you need to figure out why and find a way to stop.
You could try cutting back which some of these savings tips might help. You could also try to increase your income.
Make saving a habit
Something that will help you save money is to make it a habit.
The best ways to make it a habit is to move a regular amount on a schedule. Say you move $50 the day after payday
This happens everytime you get paid no question or thinking about whether you should save. You just save that money
You could even set up a pre-authorized transfer so you don’t have to remember to do it.
Pay yourself first
Another way to start saving money is to put it in your savings account as soon as you get paid.
Did you notice in the previous example I said the day after payday you move the money.
Paying yourself first you don’t wait to see if there going to be anything leftover you save first. And spend what leftover from saving.
Don’t touch your savings
Not spending your savings can be hard. Especially if you know that you have a lot of money saved.
There are a few ways you can fight the temptation of spending your savings.
You can make it harder to access. Take if off of your online banking. Have the account at a different bank. Whatever you need to do.
You could also nickname your savings account emergency fund. This helps remind you why your saving.
Then every time you take money out you’re reminding yourself this is for emergencies. Am I spending this money on an emergencies?
Cut back on spending
The fourth tip to help you fill up your emergency fund is to find ways to cut back on your spending.
Lifestyle inflation is real. And it’s easy to spend money without even realizing how much you’re spending.
I would recommend going over some credit card or bank statements and seeing where your money is actually going. And seeing if you can find ways to cut back.
If you don’t know where to start with cutting back here 100 things you could do to save money.
Make more money
Now you might say I don’t have the time or the energy for a second job. How can you expect me to make more money?
Here the thing you don’t need to have another job. You can start small.
If you make an extra $100 a month and put it all in your savings. You would save a $1000 in less the a year.
If you don’t know what you could do to make money read this list of side hustles you can use to make quick money.
Where you should keep your emergency fund
Now you know how much you need to save and how to find the money to fill up your emergency fund. Where should you actually keep it?
First of all, you want it in a separate account. Don’t keep it in your chequing account that makes it harder to save anything.
Ideally your money is kept in a high interest savings account. This will help maximize your savings as you would also have interest working for you.
At the very least you want to keep it in an account that won’t charge you fees. You’re saving this money and don’t need anything coming out of that account.
How to stay consistent
A large portion of saving money is about being consistent.
Sure there the initial effort of figuring out how much to save and setting up your savings account. But the bulk of your savings will come from being consistent.
It can be hard to be consistent. But there are a couple of things you can do to make it easier.
Setting up a pre-authorized transfer can help because once it set up you are no longer involved. It happens according to the schedule whether or not you remember.
Which is also great with helping make savings a habit and to pay yourself first.
Tell people around you
Sometimes people are scared to talk about money. And it is something that we usually don’t talk about.
Telling people about your goals and what you’re trying to accomplish with your money can be extremely helpful.
If you scared you don’t need to tell everyone. You can tell someone you trust like a partner and a close friend.
And you don’t need to have a big discussion about money. You could say I’m trying to save for an emergency fund will you help hold me accountable and call me out when I’m spending too much.
Track your savings
Tracking your savings can be motivating because it tells you how close you are to reaching your goal.
I like doing this a couple of ways. First of all, I make a saving goal in YNAB and it automatically tracks how close I’m getting.
I can even set an end date and then it will tell me how much I need to save each month.
I also like tracking my saving in real life. Now I do this by colouring in how close I’m getting. There are other ways you can do this just make sure it keep it somewhere you’ll see often.
Now I know for some of you just figuring out how much money you need to save or even the act of saving money can seem scary and impossible.
Follow the tips and advice in this article and take things one step at a time. Things will become much more doable.
And don’t forget to celebrate your wins.
Set up a separate savings account. Have a movie night. Just made your first deposit into your savings account. Have a dance party.
Celebrate all your wins (cheaply) no matter how small.
And keep your end goal in mind. When things are hard to remember why you’re working towards.
Think of the comfort and security that an emergency fund can bring. Think of how it would feel to know your prepared for emergencies.
The last thing is just start already. Things might not be perfect but don’t wait.
Nothing will happen unless you start taking action. And every step you take brings you closer to having a fully funded emergency fund.
Think of what the first step you need to take. Then go take that first step. You can do this.