Having a stash of money for emergencies is one of the most important steps on the road to financial success. An emergency fund reduces stress and can help you avoid financial disaster when unexpected expenses pop up. With emergency funds, you avoid accruing debt when you have surprise expenses that don’t fit into your monthly budget. Need more info on what is and isn’t an emergency? Check out Pete’s video on the importance of Emergency Savings.
How much is enough? We recommend 3 months of your monthly expenses. If your monthly budget is $2,800 in spending, then you need $7,200 in your emergency stash. That’s quite a bit of money to set aside so we’ll break it up into more manageable goals: $1,000, 1 month of expenses, and finally, 3 months of expenses.
How do I save that much money? If you have other debt obligations or if you don’t feel like there’s room in your budget, you’ll have to prioritize emergency savings above some other items for a period of time. For example, if you’re paying extra on your mortgage, you can go back to regular payments and divert those extra dollars to your emergency fund until you reach your goal.
Here are some of my money saving tips that might help you find elusive cash:
If you feel like your budget is already squeezed and can’t further reduce, here are some options to find additional income:
Where do I put this money? It’s extremely important this money is safe and liquid. Safe from you and safe from risk! That means it shouldn’t be in your checking account nor an investment account. Some safe places would be an interest bearing separate savings account, a money market or any other account that you won’t see unless you go looking for it. You don’t want to be tempted to spend this money unless necessary.
It will most likely take a little extra effort to build up your emergency savings but with just a few small goals and some creative thinking, you’ll have 3 months of expenses stashed before you know it. Most importantly, you’ll be happy you did it when, not if, an emergency hits you.