In yesterday’s blog you learned that you need to celebrate your milestones in this process. It’s long and arduous, and if you don’t take a minute to smell the roses here and there, you may get burned out. I know that we came close when we didn’t, but we made it anyway!
Today we get back to work by moving on to Baby Step #3, which is to save 3-6 months worth of expenses into your emergency fund. Why do we need to do this? Because when an emergency rears its ugly head, the emergency fund is what keeps us from going back into debt via credit cards or a home equity loan, or something else like that.
Why Do I Need Emergency Funds?
If you or your spouse were to lose your job, have to take off work for an extended illness, or if a major catastrophe would happen like a terminal illness, would you be able to pay the bills? Probably not, at least not in their entirety. That’s where this emergency fund will come in handy. It also will cover large repairs, and other emergencies that you’re unable to cash flow. Notice that qualifier. That means HANDS OFF of this cash unless there’s a real emergency. No using it for a kitchen or bathroom remodel, or to upgrade and buy a new car. EMERGENCIES ONLY!So what exactly do I mean by “Cash Flow”? That means that if you’re able to use your paycheck to cover the emergency by stopping saving into other vehicles like retirement, college savings, or toward a down payment of some kind, you do that first. The only time that you should be dipping into the emergency fund is if you’re unable to cash flow the emergency. And after the emergency is over, make sure that you build the Emergency Fund back up again before you get back to saving for other things. That way, when another emergency pops up, you’ll be just as ready as before.
What Does 3-6 Months of Expenses Mean?
It means exactly what it sounds like. You need to take stock of what your family would need to survive and keep everything going in the event of an emergency for 3-6 months. What items should you use? Rent/mortgage, food, utilities, diapers, insurance, etc… Meaning that you don’t need to add that clothing budget or the entertainment budget into the mix. You won’t be spending money on those things in the event of an emergency
Which Should I Choose? 3, 4, 5, or 6 Months?
That really depends on how comfortable you are in your job, or just in general. For instance, if you have a job that is very secure like doctor, government employee or something of the like, you can probably stick closer to the 3 month range. If you’re like me, and all of your money is based on commission (You don’t have a steady paycheck/salary), you should definitely be at 6 months. For instance, since we paid our mortgage and got rid of the daycare bill after my wife quit her job to be a stay at home mom, our monthly expenses only amount to $2,000 per month right now. Therefore we keep a $12,000 emergency fund at the bank (6 months of expenses). That’s all you really need to do. Figure out what your vital expenses are, and multiply them by 3-6. That’s your target.
That really covers everything that you need to know. It’s pretty simple:
- Build up your 3-6 month emergency fund
- DON’T TOUCH IT unless you absolutely have to!
Tomorrow’s blog will focus on a story that is very personal to me and my family. I encourage you to read it, because its really a testament as to why going through this process is so important, and how well it works. Please join me!
Do you have any questions about building that emergency fund up? Comment below!
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