Start an Emergency Fund

Emergency Fund Picture

What’s an Emergency Fund?

If you Google “emergency fund,” more than a half billion results pop up (a number sure to increase every day).  So, I want to clarify the definition. Vanguard offers a good starting point: “An emergency fund is a stash of money set aside to cover the financial surprises life throws your way.”  Bottom line, this is money that, in the event of some sort of financial emergency, will let you pay the bill without resorting to A) credit card debt, or B) a personal loan.

Why is an Emergency Fund Critical to “Stopping the (Financial) Bleeding”?

Being a former grunt, I always like to know why I’m being told to do something (goes back to the importance of setting a purpose for seeking financial independence).  So, why is this emergency fund so important to stopping my financial bleeding? In 2018, the Federal Reserve Board conducted a study that found that 4 out of 10 Americans could not cover an unexpected $400 expense.  So, if your car breaks down, you’re stuck with a $400 bill and you’re part of this group, you have two options for paying that bill: put it on a credit card or take out a personal loan. BOTH OF THESE ARE INSANELY BAD FOR YOUR FINANCIAL HEALTH!  

As I’ve already written, credit card interest is astronomically high, and interest rates on personal loans aren’t much better.  So, if you fall victim to one of these options, you’re just hopping right back on the merry-go-round of debt, because every dollar you pay towards ridiculous interest rates is a dollar that’s not going towards your financial independence. This is why starting an emergency fund right away, even if it’s a small one, is so important to your financial health - it keeps your journey towards financial independence on track when something unexpected happens.  

Getting Started & Your Short-Term (One-Year) Goal

I get it, when you’re tight on cash already from paycheck to paycheck, starting an emergency fund can be daunting.  But, you just need to FITFO (figure it the f*** out…). Here’s how:

Step 1: Open your computer and log-in to the bank account where you receive your paycheck direct deposit (don’t have online access? Get it now!).
Step 2: If you don’t already have one, open a savings account.  
Step 3: In the “transfer funds” or “make transfers” section (or whatever wording your bank uses), set up a monthly, automatic transfer for the 1st of every month for $41.67.
Step 4: At the end of 12 months, you’ll have a $500 emergency fund, which puts your financial health better than 40 percent of America.  

Using Your Emergency Fund Money

Now, to maintain the health of this account, this money needs to be sacred.  Before ever touching a cent of your emergency fund, ask yourself two questions:

Question 1: Do I absolutely, positively need (not really want) to spend this money?
Question 2: If yes, is there any other way (besides a credit card or loan) that I can pay this without touching my emergency fund?

If the answer to the second question is “no,” then you can use this money.  BUT, you then need to immediately begin the process of replenishing this account, getting it back to the level where it was prior to the emergency.  

Other Considerations

Once again, the point of this post was to simplify the emergency fund concept and give concrete steps to take right now.  In later posts, I’ll talk about the importance of growing your emergency fund so that it can cover more of life’s unexpected situations, but $500 is a great starting point.  Once you have that amount, you’ve protected yourself against a financial surprise preventing you from building long-term wealth. And, while some people will argue that the low interest rates on savings accounts right now mean your money will lose purchasing power every year, that’s fine for now.  Later on, when you grow your emergency fund, there are other options to outpace inflation. In the meantime, what’s important is that that money’s there, ready to be accessed whenever an emergency pops up.

Questions?  Thoughts? Recommendations for another topic?  Let us know in the comments!

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