How to Build a Six Month Emergency Fund…
Step 1: THE NUMBER – As with almost all aspects of your financial life the sad truth is you need some kind of budget. Most people don’t like budgets, it feels constraining, it feels uncomfortable, it‘s just not fun to have and stick to a budget, but like with all important things (like exercise and eating right), the good thing is the hard thing… but very very rewarding long term (and gets easier with time). So if you can get over this first challenge you are well on your way to building that emergency fund. Having a budget is fundamental because you need to know how much money your emergency fund needs to have!
So assuming you’ve sat down and built a budget of some sort. For an emergency fund, take a second look at that budget and determine what is fluff and what is absolutely necessary. What items would you be willing to cut out if you lost your job and you were feeling a little desperate? This slimmed down number on a monthly basis times by 6 month is your emergency fund goal. You should note that over time this amount will change and most likely go up with changes in life (buying a house, having children) as well as just general inflation. So it’s a good idea to revisit this number once every few years.
Step 2: THE STRATEGY – Okay so you’ve got your number, now what? It might seem like a daunting number. For the average American household their number would be in the $30,000 to $35,000 range. For many that sounds like crazy talk! But you do not need to save this all at once, and it can be done with some patience and work.
So where do you start?
– Reduce Your Expenses – okay the first strategy is to look at that budget you had and the stuff that you said wasn’t essential to come up with your emergency fund number and say to yourself, “Are any of these items something I can sacrifice now to get to my goal?” Beyond that you need to spend some time being creative or doing some work on ways you might be able to save money. Here are some examples… can you switch cell phone carriers and save money? Can you keep your phone longer than 2 years? Can you modify or switch your insurance to save money? Do you have any subscriptions you pay for that you aren’t using? Can you call your cable company and threaten to leave unless they give you that deal they always offer everyone? Can you get a roommate? Can you move to a lower cost place or somewhere a little further away that might be cheaper? Can you trade in your car for a cheaper car, or one with less ongoing maintenance or better fuel economy? Can you do something for yourself that you are paying someone to do right now? The list can go on and on, if you’re motivated its honestly amazing how little you can live on its just a matter of how much you’re willing to sacrifice to get to your goal.
– Increase Your Income – Say you’re at your bare bones budget, or your just not willing to sacrifice anything in your budget to get to your goal. Well you can try and earn some extra income to get to your goal. I personally think this might be the easier option for some people. In this day and age there are so many “side hustles” you can do to earn a little extra money its kind of crazy. Again some examples… Drive for Uber or Lyft, Start walking neighborhood dogs, deliver for one of the food delivery services, become a mobile notary, teach online classes, teach in person classes at a local college, find some jobs on one of the many freelancer sites, if you own your home or apartment rent out a room, start a small business (car detailing, lawn service, baby sitting…), in this day and age of crypto become part of DAO (distributed autonomous organization) and get paid to do tasks there. There are just an immense number of options here, its more a matter of your time, but lets be honest 95% of us have a lot of time where we sit and watch TV or do other things that could be turned into productive useful time. If you just worked about 5 hours a week extra, most likely with a normal gig type job you could save $3000 in a year. In 5 years you’d be halfway to the average goal.
Step 3: THE WORK – Okay you’ve got your number, and you’ve got your plan. Now is the difference between the real winners and the ones who are all talk, you need to be a doer! Just take that first step and the next and then the next. Don’t look way out at the end, just worry about the next step in your plan. Call up that company to cancel that service, look into that extra job you were considering, approach your boss about that raise you think you might deserve, etc. JUST DO SOMETHING! Each day move forward one small step.
Step 4: THE SATISFACTION – Honestly there is nothing as fulfilling as creating a goal, a plan, and then obtaining that goal. It raises your self confidence, it gives you the energy to start on your next goal. It becomes a virtual cycle that can lead to so much! An emergency fund is a first step to a better financial future, it gives you the buffer needed to take on more risk in your investing and career. Go for it! There is not time like today to start!