Setting aside an emergency fund is a great way to buy yourself peace of mind as well as money to deal with that crazy thing you didn’t plan for, but is bound to happen.
You don’t plan for bad things to happen. The unexpected is just that, unexpected.
No matter how careful we are with our budgets, no matter how precise we are with accounting, there will always be some financial beast that comes bearing its ugly head.
What do you do then?
Run for cover? Hide and hope it goes away? Charge the expenses and hope that’s the end of it?
Nope. Nope. Nope.
If you’ve prepared for a recession or other financial hardships, then you know how important it is to create an emergency fund.
Some of us, however, we learn the hard way.
We sure did. Back in 2007, we woke up and smelled the debt. I was pregnant with our sixth child. My husband was self-employed. I made occasional money as a freelance writer.
Years previously, we’d made some good money in the California real estate boom, relocated to Kansas City, and then….
And then… slowly the money that was left slipped between our fingers.
We didn’t buy a yacht, go on a big vacation, or drive fancy cars. We were frugal spenders, and it showed. I wore the same clothes I’d worn before I had kids!
In a few short years we went from having a lot of cash on hand to being $18,000 in consumer debt with two houses mortgaged, and short on work prospects. We learned very clearly how not to handle your finances.
Thankfully, we survived those rocky years. We stopped using credit, paid off our debts, and did things a bit differently.
One of the things that we did that was new was to create an emergency fund.
Okay, so it wasn’t exactly new. We’d built an emergency fund when I had our first child, but we had so many emergencies, that fund had disappeared long ago. Our hard won wisdom showed us how important it was to keep a certain amount in reserve for emergencies, but also to make sure that fund got built back up afterwards.
What is an emergency fund?
An emergency fund is basically monies that you’ve set aside for unexpected, urgent expenses. Fixing a broken down car when you only have one car counts as an emergency. Paying for your kid’s cast is an emergency.
Buying a new dress is not.
Having an emergency fund has been one of the biggest things to bring us peace over the last decade. At first it was a basic $1000 emergency fund.
At the beginning of our debt-free journey, we quit using credit cards and worked up a budget. We also started squirreling away money until we hit $1000. It was in a separate account that we could access but couldn’t easily spend.
After we got our debts paid off, we worked to build a more substantial emergency fund.
Why have an emergency fund?
Even though you might have debt or other goals to hit, having the emergency fund creates a buffer between you and more debt. It also calms the nerves tremendously. Knowing that we had that money in reserve helped us focus on the work at hand: getting out of debt.
Once you get your initial emergency fund started, you focus on paying off the debts. Later you return to the emergency fund to build it up more so that it’s available for bigger emergencies like disability or the loss of a job.
How big should your emergency fund be?
Since ours was a one-income household when we started — and that one income was subject to California state layoffs and furloughs — we aimed for an emergency fund to cover a year’s worth of expenses, once we had paid off our debts.
It proved to be a confidence builder and a financial safe guard during tough times in our state during the last recession.
The size of your emergency fund will depend on a number of factors, including your job, your household size, your ability to move if you had to, as well as the economic climate of your state and the nation.
Many financial recommend three to six months’ expenses but upwards to a year if your job is a hard one to replace.
How can you build an emergency fund quickly?
If you don’t already have one, I highly suggest that you start a little emergency fund. Do it as quickly as you can.
Consider these ways to drum up quick cash:
- sell extra cars and big ticket toys
- have a garage sale – your trash is another mom’s treasure!
- take a second or seasonal job
- collect all the coins and stray cash in the house
- cash in old gift cards
- check to see if you’ve got unclaimed funds – I found out that my brother had $420 out there ready to be claimed.
- consolidate random bank accounts
I promise that if you have a little nest egg set aside for the next rainy day, you’ll be able to be less stressed and deal with the real emergency without freaking out, as we say at our house.