Life likes to throw challenges our way and there will be a day in which, financially speaking, life will become very costly for you to be you. It’s important to be prepared with establishing an emergency fund and following a few of our steps will set yourself up for future success.
Why Have A Fund?
With a personal financial crisis, it is crucial to avoid borrowing and an emergency fund can serve as a buffer when times are lean. It is a necessity as these life-changing events can be costly and adding debt by applying for a credit card or taking a loan is only a short-term solution. According to Bankrate, research indicates that most Americans (55 million) do not have an emergency fund started. If they do have an emergency fund, 18% reported to have saved at least three to five months of living expenses and only 29% have a fund that contains for six months’ worth of expenses.
So, how do you do it? What if right now is your lean time and there is not a drop left in your budget to squeeze out to save? Luckily, there are many options.
A side hustle is more than a part-time job – it is passion driven income. Typically performed outside your primary work hours, this can range from consulting to freelancing on websites like Upwork or Fiverr or starting a shop on Etsy. This option allows you to dive into fashion, photography, writing, etc. without quitting your day job. Make sure to check your company’s policies on moonlighting and that you do not overcommit yourself with extra work. However, it allows you to enjoy your work while earning extra money for your emergency fund. It is important to remember that your extra income is just that – extra income – and not part of your monthly budget. Instead, plan for this income to be set aside and saved. Otherwise, your emergency fund never grows.
How much is enough?
First, identify the true amount that you need for basic monthly expenses. This does not include extras like cable, eating out or gym memberships but instead what is the amount that you spend on true necessities like shelter, power, and your cell phone bill. Your emergency fund should be based on your needs and there is a general philosophy of having three to six months of your expenses saved. For this account, your money should be accessible, liquid so to speak, and not tied to a restricted account like a CD. For your personal savings goal, use the Emergency Fund calculator to help determine the amount needed for your account.
Planning for Inflation
When saving a predetermined number to cover monthly expenses, inflation may not come top of mind but it is important to consider for the future. The amount that you save today, say $20,000, will not equal the same value in a decade from now due to inflation. Forbes recently suggested one option – the Vanguard Short-Term Treasury Bond ETF (ticker: VGSH) due to an easy yet low-risk way of earning a return. Simply, it is a fund that “owns government debt” with an expectation of the government paying the fund back in about three years.
Things in life happen – loss of job, unexpected health issues or natural disasters to name a few. Saving for an emergency fund is a short-term change in lifestyle that pays dividends down the road. The dinner out that you passed on this week may help you months later when money is tight. Sometimes the hardest part is making the commitment and then following through with that plan. This is a promise that you need to make to yourself and plan to keep it. The benefits you will reap will be both financial and peace of mind.