I want to spend some time talking about the most boring (and maybe the most important) aspect of your financial plan – an emergency fund. Let’s consider a scenario. Your boss walks in and says you’re being laid off. You’ll get two weeks of severance pay and that’s it. What do you do? What will happen to you at the end of those two weeks?
Where to Put It
This scenario (and thousands of others like it) is why the discussion of an emergency fund is one of the most critical parts of your financial plan. First, let me answer what you should use (and what you should not use) for your emergency fund. One of the common things I hear as a financial counselor as a “reason” for having a credit card is to have something to fall back in “in case of an emergency.” This is a bad plan. I don’t care if it is a 0 interest credit card. I don’t care if you only have it as your emergency credit card. I think it is a bad plan to use a credit card for emergencies because you will end up with credit card debt tied directly to a bad situation. Do you want to make payments on a bad experience in your life? I didn’t think so. Your emergency fund should be safe, which equals boring. You’re not trying to make money off this “investment”, it is insurance. You want it to be there if/when you need it. So setting up a designated savings account or money market account are my top choices of where to keep your emergency fund. Don’t make it complicated.
How Much to Save
Second, let’s address how much you need to save for emergencies. Let’s stick with the simplest form of an emergency fund calculator. Since the majority of Americans live paycheck to paycheck, my first goal is for you to save the amount of one paycheck. That syncs up an amount you can relate to related to your income and expenses and lets you know how much that fund needs to be. That’s a great start and it will break you out of the cycle of living from paycheck to paycheck. Once you’ve set aside the amount of one check, the ultimate goal is six months’ worth of expenses. This is a LONG-TERM goal, but something to aim for.
How to Save
Especially considering I just told you that you should be eventually trying to save 6 months’ worth of expenses, you are probably asking HOW!? Let me be blunt: to save, you must make saving a priority. Whether you simply tighten up your budget for a while or drastically cut expenses and do some extra work to earn some money, you need to get your financial house in order to a point that will allow you to save SOMETHING every single payday without fail. Make it a habit and make it a priority and the how will fall into place.