Starting an emergency fund is a crucial step in attaining financial freedom. What would you do if you suddenly had a dire situation — a sick child, a lost job, a broken heater — and you didn’t have any cash lying around to cover that expense? You’d probably have to take out a loan or put it on a credit card, which only makes the problem worse.
We all know that having an emergency fund is a good idea, but sometimes it can be difficult to get that ball rolling — especially in times of economic hardship. Today we’re going to talk about emergency funds and how you can begin contributing to one, even if you don’t have much disposable income to start with.
Check out the video below for an overview on emergency funds.
How much money should you have in your emergency fund?
Opinions on the amount you should save differ among financial professionals, but many recommend having at least three months’ worth of household expenses in your emergency fund.
How do you create an emergency fund when you’re broke?
There are a couple things you can do to gradually add money into your emergency account:
- Find money currently owed to you. Just Google “(your state) + unclaimed money.”
- Sell stuff! Whether it be on Craigslist, eBay, a garage sale, or elsewhere, selling things you no longer need or use is a great way to make an extra buck or two and get rid of that clutter.
- Save money during high-mileage weeks. Let’s say you’re a solo truck driver who averages 2,700 miles per week. It can be very tempting to reward yourself after a week of 3,300 miles, but what happens next week when you get just 2,200 miles? Don’t blow through money during good weeks. Instead, use that extra money as a cushion for low-mileage weeks.
- Have an awesome tax refund on the way? That’s great! Add it to your emergency fund. This is easier said than done, but it’ll pay off.
Even transferring a little bit to the fund each month helps. It might only be $10 a week, but that’s $500 in a year.
Where should you keep your emergency fund?
Most emergencies aren’t as time-sensitive as you may think. Rarely would you ever need $1,500 in the next 24 hours. This means that you shouldn’t make your emergency fund too handy. You need a reasonable barrier for entry to your emergency money to prevent you from using it when you shouldn’t. It is best to keep your emergency fund in a savings account that isn’t linked to your checking account. Yes, it’s less convenient, but it will prevent you from getting transfer crazy.
When should you use an emergency fund?
Feel free to use your emergency fund for unexpected, unusual, and involuntary expenses. This doesn’t mean you should use it for sales or good deals! However, you can use the money to help prevent problems in your checking account. Just know that when you use your emergency fund for non-emergencies, you are likely to create a real financial emergency in the not-too-distant future.
More money management tips from Pete:
- What’s a Dangerous Amount of Credit Card Debt?
- Credit Card Debt – The Dangers of Making Only the Minimum Payment
- How to Pay Bills When You Aren’t Home