An emergency fund can give you the confidence to go through life and not worry about your finances.
I remember when my company was going through massive layoffs. We were in the seventh round of job losses and we were warned that this round would be intense.
While a lot of my coworkers were worried, I wasn’t. Unlike most of them, I had a secret weapon, my emergency fund. Should I lose my job today, I would have enough money to keep me going until I found a new job.
Fortunately, I didn’t have to use my emergency fund and I survived layoffs. Today’s article is all about building a small savings that will protect you and your family from emergencies. You can also sign up for our free budget and save money course.
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Emergency fund 101: How to build an awesome emergency fund
What is an emergency fund?
An emergency fund is your protection from life giving you a lemon. We all know your car is going to break down at some point and job security isn’t always secure. An emergency fund is money you set aside for emergencies!
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Why should I have an emergency fund?
You should have an emergency fund so you aren’t caught with your hands in the cookie jar. What would you do if you lost your job right now? How long would you be able to survive?
Now some people would say they have a large chunk of money in the bank, so they could survive just fine. Usually, those people don’t have an effective budget. All your money should be allocated to certain expenses or savings.
You need an emergency fund so that you can be prepared for the expenses you don’t plan on happening!
How much money should you have in an emergency fund?
Financial experts, including Dave Ramsey, suggests that you should have three to six months of expenses saved for emergencies. If you lose your job, that gives you three to six months to find a new job.
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How long does it take to save for an emergency fund?
That depends on how much money you can save each month and your emergency fund goal.
The important thing is to create a budget that allows you to save money each month. Once you’re saving money, put any extra money into. your emergency fund. One tip to building an emergency fund quickly is to live on one income and save your spouses.
How much cash should you have on hand?
Your first goal should be $1,000 saved for your emergency fund. $1,000 is usually enough to cover most little emergencies.
Eventually, you’ll want to have your emergency fund built to 3 to 6 months of expenses saved. If you ever lose your job, you’ll be able to survive with enough time to find another.
I would consider placing $2,000-$5,000 into your savings account and the rest into a money market through your local bank.
Where should you put your emergency fund?
Your emergency fund needs to be accessible. You need cash quick when an emergency happens. A good place to keep it is in your savings account. You should also check into creating a money market account to put a good portion of your money into.
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How to build an awesome emergency fund
Here are some of the tips that I used to build my emergency fund quickly. You need to stay focused and grab money however you can when building your emergency fund. The sooner your emergency fund is funded, the better.
1. Sell your unused stuff!
The easiest way to reach your first $1,000 is to sell your unused stuff. Most of us have a bunch of stuff cluttering our houses that can easily be sold. It’s a good way to declutter your house and take control of your finances.
2. Work more overtime or find a second job
One of the best things I did to build my emergency fund was to work overtime. It isn’t fun working more than 40 hours a week, but you can earn good money doing so.
You don’t need to work overtime forever. Work enough to fund your emergency fund and maybe a little extra to pay off debt.
3. Build an awesome budget
Take a look at your finances and build a budget that works for your family. Try and reduce your expenses as much as reasonably possible.
Any extra money should go toward your emergency fund. You can use that money for your savings goals or investing once you have enough money in your emergency fund.
4. Eat out less
One of the biggest expenses we have is eating out. We love our food, but it causes us to eat our paychecks away. You can cook your own food for much less money.
5. Cut your expenses as much as possible
If you already have a budget, it’s time to cut your expenses even further. Try to become frugal or have a no spend month.
Should you cut your cable tv? Do you have any expensive hobbies or habits that you can stop?
6. Pay yourself first!
A lot of successful people invest their money first and then live off the rest. Most of us spend their money first and then save anything left over.
Set aside money for your emergency fund first and then see if you can live off of the rest.
Use emergency funds for emergencies only!
I once made the mistake of joking with my wife that the emergency fund could buy us pizza one night. She was not amused!
Large chunks of money have a way of burning a hole in our pocket. We want to spend. Don’t burn through your emergency fund! Remember, it’s for emergencies.
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