Emergency Fund
Lesson 3
Introduction
Since average is broke, let's stay away from anything but being prepared.
Everyone has emergencies that can't be budgeted for specifically but can reasonably be expected. So this is essentially your budget category or risk you need to save for. The lower the fund the higher the risk you are willing to live with.
"Build a 1 month Emergency fund as fast as possible. Even if you have debt, make only the minimum required debt payment until you have built a one-month emergency fund.
The one month fund is your short term Emergency fund. An average Americans fund will be between $4,000-6,000.
"...Remember to use it only for actual emergencies and to budget for everything else."
If you have used the funds for an Emergency just go back to building it back up before paying off debt or other savings goals. Many experts refer to this as paying yourself instead of a credit card who will charge you interest in your time of need.
"We found that almost half of Americans... have more than $1,000 in unused items sitting around their homes. Many Americans are simply not taking advantage of the hidden value that is right there in front of them."
So most people start their emergency fund by doing a combination of these 3:
- Sell household stuff
- Earn more money through work or a side hustle
- Reduce expenses and pay yourself more
I did some bonus episodes on making more money and saving money.
You might want to think over the last year what expenses/emergencies were unexpected.
Small Expense $500 or Less
Large Expense $500 or More
While writing this my wife texted me she broke her phone by dropping it. So things happen just be prepared for it.
For a large list of the most common forgotten budget/emergency expenses checkout this post.
"To help speed up this process, you may want to find extra or better work, sell some things you can live without, or eliminate some unnecessary expenses."
People tend to forget other than money you can also prepare for natural and common disasters. I'm not talking doomsday preper style but why not food and water storage. Now would be a good time to get a 1 month food and water supply.
Once you have your 1 month Emergency Fund you can then start paying down consumer-debt. Once that is all paid off move onto creating a long-term Emergency fund.
After you have paid off all of your consumer debt, the next step is to grow your one-month emergency fund into a three- to six-month emergency fund. Remember to keep the money for your emergency fund in a safe place that you can access without penalty. Grow this fund as quickly as you can so that you are better prepared for financial crises.
A church leader of mine once told me how they survived after an unexpected 1 year job search. They solid their extra car and ate their 1 year food storage. They were able to make their 6 month emergency fund stretch because they didn't have to pay for food.
