I’ve been insisting that you save at least $1,000 for emergencies….but does this apply to you?

Apparently I missed the memo where unexpected events never happens to you, Ms Clio.

If you’re not a psychic or any other future-telling entity,

Here’s why you need to save a Rainy Day Fund, and how to do it…

Have you heard of Murphy’s Law?

murphys-law

Has the following ever happened to you?

  • Unplanned flat tire on your car (as opposed to a planned flat tire?)
  • You lose your job and can’t land another one in just a couple of days.
  • You start your car in the morning, but nothing happens.
  • A bill you forgot about has now come due.
  • A relative or friend passes away suddenly in another part of the country.
  • You (or your partner) unexpectedly becomes pregnant.
  • Your identity gets stolen and you are locked out of your accounts until things get straightened out.
  • Somebody in your family, or yourself, becomes ill or injured and needs sudden medical attention.
  • You find yourself on the side of the road with a car that won’t run.
  • You start needing a prescription that isn’t covered by your insurance.
  • An appliance in your home suddenly breaks.
  •  Somebody slams into your car, making it un-driveable.

If you have experienced any of these, any situation where a sudden influx of cash meant the world didn’t end… OR if you think any of these things could potentially happen to you…then guess what?

You need an emergency fund.

An Emergency Fund (AKA Rainy Day Fund) is Murphy’s Law Repellent. Life is going to happen. How you prepare financially is the difference between dealing with the situation, or crumbling under the stress.

Even if you don’t think you need an emergency fund, think again.

Here’s the most recent time I used my emergency fund.

The following photo is a picture that I took last weekend. We flushed the toilet in our bathroom and found a puddle of water under it. Yes, the nasty kind of water.img_0010

My husband and I are a bit of “handy-men”, and we are also ’bout that life of Frugal Living, so one YouTube video later…we repaired our toilet. If we weren’t so inclined to fix it ourselves, we’d be calling a plumber and getting a $150+ bill for Saturday hours.

Contrary to what you’re thinking, we didn’t plan to give up our afternoon playing with the toilet, and we didn’t wake up with the plan to spend money fixing it.

If we didn’t have an emergency fund, what would we do?

NOT answer when ‘nature calls’? Allow our tile to continue being a bio-hazard? Ignore the problem and let it cause thousands of dollars in water damage to our house?

The emergency fund saved the day!

Here’s how you can save an emergency fund.

  • Auto Transfer: Set up an automatic transfer in your bank account to automatically save X each paycheck. This way, it happens regardless of your discipline.
  • Pay Yourself First: Don’t want to use automatic transfers? PAY YOURSELF FIRST. Be mature enough to put X each paycheck aside… FIRST. Not “after the bills are paid”, nor “after grocery shopping”. Make saving for emergencies the most important priority of your budget. Why? Because when emergencies happen, they don’t wait on payday.
  • Do Not Touch: Once you’ve got it saved, do not spend it! It is not there to help you buy a TV, pay for holiday gifts, or to be used on vacation. This money is to be used ONLY for times when you’re in a financial crisis and need the cash to survive it.

Look at your budget and figure out how much you can comfortably put aside. If you’re starting out, I recommend $100 a month until you reach $1,000. That’s $25 each week, for less than a year.

Once you have saved 1k, pay that $100 a month towards your debt, short-term savings goals, or wherever it will have the most productive use. You’re already used to living without the money, so make sure it keeps working for you!

Can’t swing $100 a month? That’s fine. Do $50. Or try $25. Whatever your budget says is the MOST you can save per month, do it, and don’t stop until you’re fully funded.

Here’s how much you should be saving.

  • Are you in debt? If you are working on getting out of debt, I recommend saving $1,000 in a savings account that you can access 24/7, but cannot access soooo easily that you are withdrawing from it many times a month make mundane purchases.Why should you save $1,000: This is a comfortable, and ATTAINABLE figure that will cover the cost of many, many things. Doctors bills, 4 new tires, a new washing machine, an unexpected car repair. Lost your job? This will help offset your bills while you get back in the working force. Long story short, it’s your personal insurance policy and your 0% interest short-term loan.
  • Are you debt free? If you do not owe any outstanding debts, and will not in the future, I recommend saving 3 to 6 months of your expenses in a savings account that you can access 24/7, but cannot access soooo easily that you are withdrawing from it many times a month make mundane purchases.. This one takes time to do, but it’s the strongest step you can take to achieve financial independence. How do you know what 3-6 months of expenses are? Look at your budget, and add up all of your bills, and all of your “spending” (groceries, gas, shopping, etc). Multiply it by 3…and save that much. Once you have, double it. Boom! Nest egg filled.Why you should save 3-6 months of expenses: This is a strong, sturdy figure that will cover almost every possible situation that you could find yourself in. If you lose your job, you will have 3 to 6 months to replace your income while still living the same standard of life that you’ve become accustomed to. Long story short, it’s your personal insurance policy and your 0% interest short-term loan.

What happens after the emergency?

You take a BIG sigh of relief and reflect on the fact that you just wrote a check instead of freaked out all night long. You didn’t have to borrow money from anyone, beg, plead, or try to cut corners to deal with your issue. You handled it like a mature and responsible adult! Woo hoo!

Then, you start re-paying your emergency fund until it’s fully funded again so you are prepared for the next emergency.

Notes: I mentioned budgeting a lot in this post. If you haven’t joined adulthood and made one, here’s the LINK that explains how to track your cash and make your money work for you.