I have to admit this to you; I am not to this point yet. So let’s imagine the feelings you’re having. You have your rainy day fund and no debt except your mortgage. What a feeling! The thought makes me so excited for you. I am not saying it was easy because paying off debt is hard work and you did it! Remember this feeling because it’s got to be wonderful!
Now because I have personally not been at this point yet, I am going to give you advice from others because this is what I will be doing.
HOW MUCH DO I NEED?
A fully funded emergency fund covers 3 to 6 months of your expenses. What amount of money would you need to live for three to six months if you lost your income? A fully funded emergency fund usually ranges from $5,000 to $25,000 but it really depends on your expenses. Plus you already have $1,000 to $2,000 in it!
To help make this easier for you, I have created a chart that will help you figure out the amount you need, plus you can keep track of your progress. Download the Emergency Fund PDF, here.
WHAT’S THE FUND FOR?
Remember when we talked about a rainy day fund? Well it’s going to rain and you will need an umbrella. This fund is for when the big stuff happens that you can never plan on. If you do not have this fund, how else will you get the money? Credit cards, more debt? This will only make you back track to the last step and no one wants that again. This foundation you are building will help you stay out of debt forever…
This fund again is for something you had no way of knowing it was coming. Some emergencies would include paying medical bills, deductibles on insurance after an accident, loss of job, broken down car, water bursting from a pipe. All of these are emergencies. Something on sale, fixing a toy (boat or RV), buying a car, going on vacation, or remodeling you home; are not emergencies. Those are items that you should save for then purchase.
WHERE DO I KEEP IT?
This fund needs to be in a place that will not penalize you if you need to use it. Remember that bank account you opened for the rainy day fund, this would be a great place to keep it!
The point of this fund is not for investments, it’s for a rainy day! Make sure you can use it if you need to.
DO I NEED 3 OR 6 MONTHS?
When you think of the purpose of this fund it’s to absorb the risk. It’s a protection and for peace of mind. So the more risky your situation, the greater your fund should be. For some examples; if your income is commission based or you’re self-employed, you should use 6 months. Single or one-income married household, you should also use six months. If your job is unstable or there are medical problems in the family, you too should use 6 months. Make your decision on what your risk is and what gives you peace of mind.
Here’s that word again but it’s so important. Everyone needs to agree on the process. In this step if one of you feels you would be fine with 3 months but the other is thinking on the line of 6 months. You go for the higher! You both need to feel the protection of this fund, so do not ask again. Just go for the higher.
THE CHANGE IN THE TIDE
At the start of this journey, everything that happened was probably a money emergency. But as you have learned how to budget plus change your habits, you will use the emergency fund less and less. Yes you have fewer things you have to cover in your monthly budget that makes this possible. That broken down car can now be paid by adjusting the month’s budget to pay for the repairs. What use to be a huge, life-altering event, is now an inconvenience. This feeling is wonderful because the waves are now working for YOU!
OK I HAVE MY EMERGENCY FUND, WHAT’S NEXT?
You are now in a fantastic place and now it’s time to think short and long-term. It’s time to think of retirement, college fund for your kids, and that mortgage. PLUS start living your dreams!!!