The first step in creating a good financial foundation for your family is creating an emergency fund.
You may be wondering: What is an emergency fund and Why do I need one?
Read on because I’m going to address the Who, What, Where, When, Why and (most importantly) the How of an Emergency Fund.
WHO needs an emergency fund?
You do. Seriously. If you are a person who has income and expenses, you need an emergency fund.
WHAT is an emergency fund?
An emergency fund is money that you have set aside to save for a rainy day and it is to be used only in the case of an emergency (not just because you want to go out to dinner more than your budget allows for this month).
WHERE should you keep an emergency fund?
There are different schools of thought here, but it is generally recommended to keep it in a savings account that is easily accessible. By that I mean one that is attached to a checking account that has a debit card. So if you have an immediate expense you can transfer the money and then spend it within minutes.
WHEN should you start an emergency fund?
Now. Don’t delay. This is the first step in building a solid foundation for your family’s finances.
WHY should you have an emergency fund?
Uh, because I told you to. Just kidding! Seriously, you should have an emergency fund because it will give you a HUGE sense of peace in your financial situation. It will allow you to make decisions from a feeling of abundance rather than scarcity.
HOW do I create an emergency fund?
There are a few components to the how.
Q: How much should I set aside?
If you are just starting out, I recommend setting aside $1,000 for a basic starter emergency fund. This is often enough money that it feels like you have a small safety net so you don’t have to pull out the credit card anytime an unexpected expense arises.
However, an emergency fund should ideally have 3x your monthly expenses saved up. These can be bare bones expenses, so you don’t need to include things like money you put into a retirement account or extra money that you are throwing at your debt snowball. But more like three months of essential expenses: rent (or mortgage), utilities, food, childcare, and some entertainment as well.
Q: How do I build an emergency fund?
There are several ways you can go about building an emergency fund. Here are a few ideas to get you started:
- Sell off Assets – Do you have a collection of something just sitting around that you don’t use or that could be pared down? When my husband and I first built our emergency fund we sold off some things that were no longer serving us.
I sold off my entire Barbie collection that was started for me as a kid, most of it really had no value and I certainly didn’t look at it, it was just a bunch of Barbies in boxes being hauled from basement to basement.
My husband sold off part of his record collection that he didn’t listen to. We still have a ton of records, we love them, but we sold off ones that were of high value to others, but not to us.
- Start a Side Gig – Consider what skills you have that could be turned into a side hustle. Don’t think of this as starting a new business venture, but rather something that you could do for a short term to just build up some extra money. For example, do you have a skill or hobby that you could turn into short term income? Maybe doing yard work, selling a craft or babysitting? Or maybe you could pick up a little side job like being a virtual assistant
- Use a windfall – right now is tax season. Many families are getting tax returns and although it is tempting to spend that return on something fun and lavish, consider setting some (or all) of it aside for your emergency fund. If you do have a large expense that you want to make, you will now be in a position to use your monthly budget to work towards that large purchase.
Also, here in the United States, many families are about to get a decent sized stimulus check. This money is designed to be used for families to continue spending so that our economy can keep moving forward, but it’s also a great opportunity to take $1,000 from that check and set it aside as an emergency fund.
However you decide to build your emergency fund, throw everything at it and be RELENTLESS until it’s at least $1,000. Then later once you feel like you have a solid budget in place using the Abundant Money Method, you can include three months of savings into your budget as your ONE THING line item, and watch the magic happen.
You’ve got this, mama!
If you’d like to learn more about the Abundant Money Method that we use inside Financial Confidence Bootcamp, I invite you to click here to find out more.