It is dependable when you are out of luck and fresh out of cash. It can lift your spirits on the worst possible day in the
history of your finances. It can keep you from going hungry or cold. What is it? It’s not your best buddy – it’s your emergency fund. Emergency funds are an absolute must for every adult alive. Contrary to what you might be led to believe, nothing is secure.
Your job, your home, your health – it can all disappear in an instant. While it’s obviously not good to focus on the negative potential in life all the time, it’s also not good to ignore it. You need emergency funds in case something goes wrong. That’s a fact. Maybe you already realized this and built up an emergency fund at one point. But then, life happened, as you knew it might but hoped it wouldn’t. Your funds were sucked away and now you are left at square one once again. What should you do?
The answer? Rebuild. It might be disheartening to look at the $0 balance and realize you have to start from scratch, but it will be more disheartening if you have yet another emergency and you have not taken any action to turn that $0 balance into a surplus. You need to start saving and start doing so now. The good news is since you’ve already gone through this process once, you know firsthand the benefits associated with meeting your goals, but you may still have challenges along the way.
What is an Emergency Fund?
Technically speaking, an emergency fund is just that – a fund for emergencies. Sadly, many people do not understand this concept. Or maybe, they are struggling to realize what an emergency actually is. Emergencies should be categorized as something catastrophic. A job loss. A major
health crisis. A serious problem with one of your home systems. A car repair.
Emergency funds should NOT be used for last minute sales, holiday gifts, birthday presents and vacations. None of those occurrences are emergencies. Those are events that can be planned for. They are not necessities of life. That is what emergency funds are for – maintaining your livelihood in the wake of an unavoidable and unplanned bill over which you have no control.
Why was your Fund Drained?
The first step towards a successful rebuild of your emergency funds is to truly assess why your account was drained in the first place. Did one huge bill wipe it all out in one fell swoop or did you have multiple additional expenses over a period of time and weren’t able to replenish the fund enough? Be honest with yourself. If you had to dip into the emergency fund because you overspent on another budget category, take ownership of that. While there are no guarantees you won’t be back in the position you are now again, by recognizing bad spending habits you can definitely reduce the chances that your emergency fund will be depleted for invalid reasons in the future.
Go Into Emergency Budget Mode
The first step you should take when you have no emergency funds on hand is to immediately revert back to a sparse, bare budget. Question every single bill you pay on a regular basis. First, tackle your utility bills. Can you lower your thermostat to also lower your heating bill? Can you use a fan instead of the air conditioning system? Ask your utility company to conduct a free energy audit to tell you how to make your home more energy efficient. Try to limit the times you run your dishwasher and laundry machines. It will pay off significantly when your next utility bill comes in the mail.
Next, assess your entertainment choices. If you added a few channels to the cable bill because you could afford it at the time, now is the time to renegotiate with them to get your bill lowered. You should also consider cutting the cord altogether for the months it takes you to replenish your savings. You can rely on internet-based streaming or use your newfound free time to work towards your savings goals instead of sitting in front of the television.
If you own your home and you have extra space, consider renting out a spare room to a local student. It can help you offset your mortgage payment. If you rent and your lease is coming up, consider partnering with roommates for a cheaper place to live.
It’s time to stop eating out and start cutting coupons. Challenge yourself to spend as little as possible at the grocery store, cook your meals at home and pack lunches for work. Emergency budget mode can shave off hundreds of dollars per month from your usual set of bills. You can do it – it is possible – and your emergency fund will thank you later.
However, there are a few exceptions. Don’t ever scrimp on must-haves, such as life insurance or renter’s insurance. You need these policies to cover you in case of OTHER emergencies. You can definitely shop around and try to find lower rates on things like car insurance, but don’t take too many risks and start canceling these plans. They are essential for your long-term well-being.
Set New Savings Goals
If you’ve been saving money into other categories prior to your emergency, it is time to cancel out those contributions. You must revise your savings goals right away. For example, maybe you started building up a travel fund or a Christmas and holiday fund. Those are both great goals, but your emergency savings always take precedent. You should immediately start putting all your extra cash into your emergency savings.
If you have money sitting in alterante savings accounts, drain that cash into your emergency fund. Set up automatic withdrawals to come out of your paycheck every week. Then, at the end of the week, take all of the money you’ve saved from cutting your budget down and place that in the account as well.
Also, there is a reason your emergency funds were depleted – there wasn’t enough available. You obviously need to rebuild your fund bigger than before. If your first goal was $1,000, you clearly have to at least double that figure this time around. Most financial experts agree that you should add up all of your monthly expenses and multiply it by three to six. If you are single with no dependants, three months of living expenses saved is adequate. If you have a family, six months of living expenses is preferred. If you have a known medical problem, try to target more like eight months worth of living expenses.
You might be struck by how big this number is, but it can’t be avoided – you have to put the money away some time. If you never use it, that’s a good thing. If you need it, it’s there. There is no excuse for rationalizing away emergency funds. You will never regret saving money, but you can regret spending.
Make More Money
You knew “get another job” would be on this list, but before that topic is addressed, think about the job you already have. Do you get a big tax refund in April? Why not adjust your withholding through your HR department and get more money deposited into your account every month instead? You can immediately start budgeting this increase towards your savings – you won’t even notice a change in your budget.
Also, consider how you’ve been doing at work. If you have worked there for a long time with no raise, think about asking your supervisor for a review. While it is not the time to call your job into question, you should be rewarded for your hard work and if you think you deserve it, go for it.
Next, consider taking on side work. Clean or paint houses on the weekends. Become a freelancer and market your skills. Teach or tutor in a topic you have excessive knowledge. Sell items on eBay. Whatever you decide to do, put all the cash towards your emergency fund account. Don’t get tempted to spend it – put it right into savings. This will expedite your rebuild of your emergency funds even faster.
Gather Loose Money
Whether you realize it or not, you have loose money floating around. You can use your spare change to beef up your emergency fund. If you withdraw $20 and only use $18, put the $2 aside for your fund. A helpful way to make this a priority is to get a large jar and keep it in your kitchen, depositing all extra money at the end of the day. Take it to the bank when it gets full.
On a larger scale, if you have a stock portfolio, assess how you are reinvesting your earnings. If you have dividend stocks, take the extra cash earned from these accounts and direct them into your emergency fund. If you have bonds that are ready to be cashed out and have reached their full earning potential, place those in your fund as well.
Use Your Experience and Stay Focused
Think back to when you first started working on building emergency funds. What discouraged you the most? What helped you the most? If you found motivation from talking about your savings goals with a friend, find someone to partner with and encourage each other along the way. You can read many articles online from financial bloggers who offer encouragement and helpful tips as well. Dig into your money-saving and become the best at it. Perfect your knowledge on the topic. Develop a passion for saving.
Make sure to reward yourself when you reach certain milestones. When you finally accrue $500, buy yourself an ice cream cone or other small treat as a reward. When you reach $1,000, reward yourself with a cheap movie rental night. You know better than anyone what keeps your head in the game. Don’t let up until you have reached your final goal.
How to Prevent the Need to Use Your Emergency Funds
Ultimately, the goal is not to only build up your emergency savings, it is to prevent the need to use them at all. You want to make your finances so watertight that anything life throws at you can be easily handled with your resources and assets available.
Where Do You Keep Your Fund?
To prevent impulse buying with the assistance of your emergency fund, reassess where your funds are held. If they are in a savings account that is connected to your checking account, consider moving the balance to a separate bank. This will still allow you to withdraw the money as you need it, but you won’t be tempted to instant transfer the cash to your checking in the heat of the moment. If you do want a small amount of cash available for instant withdrawal, keep $1,000 in the connected account and move the rest.
Proactive Maintenance is Key
Start being proactive when it comes to your home, your car and your health. Don’t wait until the roof starts leaking – pay for an inspection and repairs beforehand. Get your appliances fixed. Get your HVAC systems serviced. Make sure your car has regular oil changes. Replace the tires before they go bald. Read the owner’s manual and follow maintenance recommendations. Go to the doctor on a regular basis, eat healthy and exercise. Complacency is not just a factor when it comes to your finances, it can also get you into trouble when taking care of, or forgetting to take care of, yourself and your possessions.
Make Honest Assessments Before Making Withdrawals
Make sure you are making the right decision before you take out any money from your emergency funds. First, see if you could absorb the emergency cost in your monthly budget by cutting back even further. See if you can shop around and find a cheaper solution if the repair is related to your car or home. Don’t fall into the trap of leaning too heavily on your emergency funds, and they will be there for you when you need them the most.