An emergency fund is really a freedom fund
While helping you manage life’s surprises, it also allows you to seize opportunities that come your way.
What would you do if you lost your job tomorrow? How long could you go before needing the charity of others (i.e. how excited will your parents be when you move back home)?
An emergency fund is just what it sounds like: it’s a stash of money in case s#@% happens. It’s what allows you to sleep at night knowing that even if you lose your job, you’ve got savings in the bank that will keep you afloat until you find the next one. 28% of Americans have less than $1,000 in savings, half could not come up with $2,000 if they needed it to cover an unexpected expense in the next month. Don’t be a statistic. You can and should do better.
Now let’s talk about happier things. Your emergency fund has another purpose. Say you get an offer for your dream job, but the gig is in a different city. With your emergency fund topped up you’ve got the moving costs covered, so you don’t even have to think twice about taking it.
An emergency fund is really a freedom fund. It allows you to seize the opportunities that come your way.
The key to an emergency fund is to make sure that you have enough, that you keep it full, and that you keep it safe:
The ideal rule of thumb here is that you should have at least 3 months of take-home income in your emergency fund. If your monthly take-home income is $3,000, then you should shoot for having a $9,000 emergency fund. That sounds like a lot, but again, you’re protecting yourself in case you lose your job, so you need a good chunk set aside.
Keep it full
If you dip into your emergency fund (and at some point almost everyone has to), your top priority is to fill it back up again. Half full means only half the protection (or half the freedom!).
Keep it safe
Your emergency fund should sit in its own savings account where it is accessible but safe. You should not invest your emergency fund, because investing involves risk, and this money absolutely has to be there when you need it.
If you have debt, get your emergency fund to $1,000, then reassess
If you’re struggling with a lot of debt and putting aside three months of take-home income sounds completely unattainable or ridiculous, start small. Build your emergency fund up to $1,000. Even with a lot of debt, you still need some cushion, otherwise the first surprise that comes your way will put you even further into debt, or worse, knock you out. Once you’ve hit $1,000 in your emergency fund, then start paying down that debt as fast as you possibly can. When you’ve made a big dent in your debt, then you can come back and top up your emergency fund to the full 3-month level.
Make it automatic
We’ve said it before: if you pay yourself first and put this stuff on auto-pilot, you’re much more likely to be successful. Once you’ve followed the directions below to set up your emergency fund, take 2 more minutes to make filling it automatic.
As you get older, make sure you increase your emergency fund
Remember, you are aiming for 3 months of take-home income in your emergency fund at this point. As you move up the ladder at work, your emergency fund should increase as your salary increases. Also, as you start picking up more responsibilities (like a house or a family), you should have 6 months of income in your emergency fund. Once you start making the big bucks, you need 12 months. It may be counter-intuitive, but as you get more senior in your career, it is actually harder to find a new job because you are more expensive to hire.
This is a critical, first step in building a strong financial foundation and we’re working really hard to make it easy. In the meantime, get ahead of this process and start building your emergency fund today.
1. Make sure you have a dedicated account. You won’t be dipping into this all the time so keep it separate from your spending money.
2. Choose whether you need 3, 6, or 12 months of an emergency cushion, and calculate your goal amount using this formula.
3. Start filling your emergency fund. If you can fill it up already, transfer the money into your new emergency fund right away. If you can’t do that just yet put as much as you can into it today, then start putting 5 or 10% from each paycheck until it’s full.
Gathering empowers young people to meet life’s goals and challenges through smart money decisions. We are on a mission to make money work for all of us.
Sign up to be part of the movement and join us on this journey.