Financial goals are incredibly common in the PowerSheets® community, and it makes sense: money makes possible most aspects of our lives! (And most of the goals we want to work toward, too!) It's also a topic many of us know little about, which can make getting started challenging. If that's you—you're raring to go but just need direction—I've got the perfect financial mini goal for you this year: making an emergency fund!
No matter what financial position you're in or what financial goals you have, I can say with confidence that if you don't have an emergency fund, you need one. An emergency fund is the necessary foundation every other financial goal is built on. When it's in place, it allows you to funnel all available "extra" money towards another goal, like paying down debt or saving for a down payment, without worrying that an unexpected expense will derail your progress, cause you to rack up credit card debt, or leave you scrambling for cash.
If you're someone who feels chronically anxious about money, it will also go a LONG way toward lifting that burden and clearing your mental load. Sometimes, we don't realize what a weight we're living under until it's lifted!
An emergency fund is for:
— Paying for something you had no way of knowing was coming and that would have a major impact on your family if you didn’t cover it. Examples include paying the deductible on insurance (health/homeowner’s/car), medical bills from an accident or unforeseen medical problem, or a major problem with a necessary car.
An emergency fund is not for:
— Buying a piece of clothing that’s on sale, a couch, a car, or a vacation.
— Building wealth (more about this below).
What does an emergency fund look like? Almost every source suggests a fully-funded emergency fund should cover three to six months of expenses. If you have a steady, secure job (think honestly about this!) that you’ve held for a while and everyone in your family is healthy, then three months might be sufficient. If you are self-employed, work in a sales or commission-based job, and/or have chronic health issues, I’d lean toward the six-month mark.
Your emergency fund should cover expenses, not income. If, say, you lost your job, you’d obviously try to cut back in as many areas as possible, but you’d still have to have somewhere to live, have something to eat, and continue to make any recurring payments like a car or student loan. For many families, a 3- to 6-month emergency fund ranges from between $6,000 to $25,000.
How can I get started? Open a savings account you can designate for this purpose to keep this money physically and mentally separate from the rest of your cash (we like Capital One 360). If possible, transfer in a larger lump sum to get the ball rolling: ideally $500-$1000, but smaller is absolutely okay! Don't despise the day of small beginnings :)
Then, set up an automatic transfer each month from your paycheck account to your emergency fund account. When we were growing our emergency fund, my fiance and I each contributed $75 from our paychecks. More is always better, but some is better than none!
Hopefully, you'll find that you don't miss the money much if it's not there to spend. Even if it's only $25 or $50, transfer it from EVERY paycheck, and resolve not to touch it. Pretend it's not there!
How to complete your emergency fund: Over time, increase the amount that you’re saving. It might take years, but eventually you’ll have a very comfy cushion to fall back on, should you ever need it. And really, it’s okay if it takes years! Just the mere existence of a cushion allows you to focus on other things (and keep building a bigger cushion), because you’re not constantly being sent back to square one/back into debt the minute something unexpected happens.
Saving for an emergency fund is NOT fun — or at least, it wasn’t for me, and I am someone who really loves saving :) A good emergency fund is B-O-R-I-N-G. It has to be an account with easy access and basically zero risk, which typically means a standard savings account. With current low interest rates, your returns are going to be tiny even on a large chunk of money.
Worse, there’s no anticipation of saving up for something fun, like a vacation or a wedding. At the end, you won’t have anything to show for your work, like a house, since most of us don’t go around flashing our bank statements. The motivator here is lifelong financial security, which, while AMAZING when you step back and think about, is not as gratifying in the short term.
BUT, the AWESOME thing about an emergency fund, is that once you fund it, you can check it off and move on, unlike, say, retirement savings. Even if you are forced to dip into your fund, it’s unlikely you’d need to wipe it out in one go. And if, at the end of your life, you still have a fully funded emergency fund? Well, you’ll just have more to give away — not such a bad problem to have :)
Here are my three best reasons why YOU (yes, you!) should get started with an emergency fund today:
1) It takes no time. You just need a savings account and an automatic transfer, and you can set it and forget it. There’s no need to monitor the account closely.
2) It takes no experience. A savings account is very simple and stable, so there’s almost no way to do it “wrong” — unless you don’t do it at all.
3) It takes not very much money. Unlike, say, paying off debt, it’s okay if you go slower on this one. I would suggest making an initial contribution of $250 or $500, or $1000 if you can swing it, but from there, start with whatever monthly contribution is comfortable for your budget and try to increase the amount every year.
YOU can do this friends! And you will feel so good when you do, I promise!
I'd love to hear: have you set a 2020 financial goal? Tell us below!
P.S. Want to improve your finances in 2020? Alongside your PowerSheets, use our Finance Goal Guide to dig into areas of improvement and make a plan for real change. You'll be so glad you did!