high income, not rich yet

Five Tips To Save An Emergency Fund

Five Tips To Save An Emergency Fund

An emergency fund is the first step in building financial wealth and independence.

A few months ago I was pulling out of my office building when the tire on my Subaru grazed the sidewalk – Pop!  Within a few minutes, my tire was flat and I was stranded on the side of the road. New tire and tow? $200.

A couple of years ago I was standing in line at an outdoor food truck rodeo when the 100-degree heat got to me and I fainted – Crack! My head hit the sidewalk and I was taken to the hospital in an ambulance. Even with my health insurance, it was a cool $950 out of pocket.

Emergency funds are boring.  But these savings allowed me to deal with these unexpected expenses without needing to rely on my credit card.

Building an emergency fund can seem impossible when you’re just starting out. After all, deposits are needed for new apartments, moving trucks to get to your new job, and work-appropriate wardrobes are not optional.  All of these big, one-time expenses can make it hard to build savings.

Ditto if you’re living paycheck-to-paycheck.  High student loans and rent? Both of these make it hard to save money.

Emergency funds can be even more important for women. 

In 2009, 2.1 million women lost their jobs.  And women age 18 to 44 have out-of-pocket health expenses that average 69 percent higher than men.   Yet nearly 44% of single women have less than $1000 saved.  This fact is holding back women from having freedom and power in all aspects of their lives.  The point of saving money isn’t to be rich – the point of saving money is to have security, freedom, and independence.

And opportunity.  One of the best decisions I made was spending half my emergency fund to buy a new house a few years ago. That home became a profitable rental until I cashed out on an upmarket.  Without money saved I wouldn’t have been able to seize that opportunity.

So how much should we save in our emergency funds?

That’s a hotly debated topic in personal finance. Dave Ramsey advocates saving $1000 initially as your first step towards an emergency fund and financial independence.   The White Coat Investor and Daily Worth Suggest three to six months of necessary expenses as a good starting point.  Others have advocated that $0 is sufficient (but kept large amounts of money in fairly liquid investments).

Frankly, I don’t think either is necessarily a wrong positions to take.  If you’re sitting there with $500 in your checking account, $1000 on your credit card, and no savings account – then you can’t go wrong either way.

If I just described your situation, I’d start with a savings account.  Save a $1000 and put it in there.  Ignore it.

While there are more efficient ways to build wealth than holding extra cash in a 1% savings account, it’s a lot better than having an unexpected dentist bill or your dog deciding to eat a nail and a corresponding emergency vet bill (true story) that costs you 15%-30% in interest when charged to your credit card.

Similarly, I wouldn’t want to have to sell shares of stocks to cover a vet bill.

Holding onto some cash is important, and, for most people, the best way to hold that cash without spending it is to put it into a separate account labeled “Emergency Fund.”

Start with $1000 and build to 3 Months of Expenses.

Start with $1000 and save three months of expenses.  While that can mean different things to different people, I think about $10-20,000 (give or take) in cash feels about right.  Anything over and above that can go into conservative investments (more on this later).

Currently, my emergency fund has just over 3 months of minimum expenses saved up.  In figuring out this amount, I have not included 3 months of student loan payments. That’s because our student loan lenders – and nearly every student loan lender I know – will grant you (almost) automatically a three-month deferment in case of job loss or hardship.

I also think Millenials are a generation of hustlers, and most of us would find new employment with 3 months of being fired or let go.  This is especially true if you live in a larger metropolitan area with numerous jobs available.

If you have a high net worth due to extensive investments, you may want to keep your cash on hand to just a few thousand.

But for high earners that aren’t rich yet? Hold onto some cash.  Use it as a buffer against dipping into investments, taking on credit card debt, and to give you the ability to seize opportunities (like buying a rental house on your street).

So, how can you save that first $1000 in your Emergency Fund? 

For graduates who have fairly high incomes (depending on where you live, that could be $60-100,000+), saving the first $1000 should be done as soon as possible.  Cut bars, lattes, and uber eats and get laser focused on that first $1000.

1.  Set up a Separate Emergency Bank Account.

The best place to put your emergency fund is in a separate bank account that is not directly connected to your checking account.  Out of sight, out of mind.  I’ve used both Discover Bank and Ally Bank for this purpose, and both have been great.  If I had to pick one I’d go to Ally bank for their slightly better rates and ease of use.  Got a few extra dollars you don’t need for bare necessities this month? Go ahead and send that to your shiny new bank account.

2.  Automatically Transfer $20/week Into Your Separate Savings Bank Account.

Set up an automatic transfer from your checking account to your new savings account for $20 each week. Most of us won’t miss the $20 a week.  Even if we are *think* we will, it’s amazing how you’ll find ways to spend just a bit less when the money is no longer there.  Over the next year, you’ll save $1000 do this (52 weeks x $20 = $1040).  Do you need to save more of your money? Absolutely. But if this is your first serious attempt at saving it’s a good place to start.

3.  Better yet, Have Your Employer Transfer Money Into Your Savings Account For You.

Most employers have you fill out a direct deposit form when you begin working for them.  What I didn’t realize at first is that you can have your money directly deposited from your paycheck into more than one account.  This makes it even easier to automate your finances and save money quickly.  Automation is one of the key tools in building wealth and something I first learned from the book I Will Teach You To Be Rich.

4.  Jumpstart Your Savings By Canceling Unused Subscriptions and Services.

Last October I did a subscription purge for Mr. Graduate Investor and I and started saving us $49 every month.  Turns out we had duplicate Netflix accounts (oops!), duplicate Amazon Prime accounts, and a gym membership that I didn’t use that cost $29 each month.  Many of us have unused subscriptions services that we aren’t using.  After canceling those subscription services, I immediately set-up an extra $50/month deposit into our savings account.  This is one of those small wins that nets you an extra $600/year easily.

I’m a big believer in getting the small stuff right to set yourself up for overall financial success.  Sure, at a certain point if you’re making six-figures it may seem easy to dismiss the cost of a $5 latte or $4 avocado toast as insignificant to your overall income.  But unless you’re buying that latte and toast with intention, and you’ve already set-up your financial plan to include retirement, emergency fund, and debt repayment, you’re likely to be engaging in lifestyle inflation rather than fiscal responsibility.  Put more simply, it’s hard to walk before you learn to crawl.  Starting out it’s better to be extra diligent on even small expenses, especially if the goal is financial independence.

5.  Don’t Touch Your Emergency Fund Unless It’s a True Emergency.

Seriously.  Don’t touch it.  Have a minor car repair? Try to figure out if you can budget that into your monthly budget without touching your emergency fund.  Need to fly home for a wedding? Ditto. That should be in your travel plan – not come from your emergency fund.  Think you need to use your emergency fund but you’re still spending $600 on restaurants this month? Stop. It. Cut the bars and restaurants before touching your emergency fund.

 

Readers, what do you think? How much is enough to save in an emergency fund? How are you saving it this year?



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