Bad things happen. Someone close to you could die and you might just have to pay funeral costs; layoffs happen; your only transportation could break down; your investments might turn upside down; your home value might drop too low right when you need to sell it. Preparing for these obstacles is smart. Why?
Because things like these are inevitable. It's easy to think that no bad stuff will happen. This is why it's not uncommon for most people to ignore life insurance, safety nets, and long term investment strategies.
If you're on the road to financial freedom, then congratulations. If you've set your sights on hitting significant wealth milestones, then you and I have something in common. It's all great to shoot for these goals, but be mindful that fully investing yourself, leveraging your assets to their full potential, and/or not maintaining a significant savings for inevitable problems along the way is a bad idea.
When financial trouble comes your way, you'll either suddenly realize that you're not invincible or you'll have wisely set aside an emergency fund.
An emergency fund is a store of money that you've set aside and contributed to regularly so that you can respond to difficult financial trials as they come. The amount differs for everyone, but most say that your ultimate goal should be to put aside enough to cover costs for six months.
Six months of expenses may shock you, but you should only take into account those costs that are necessary. The cable bill, the data plan on your cell phone, and the World of Warcraft subscription are not necessary. You should exclude those from your six month savings goal. If you happen to hit hard times, like losing your job, you should quickly cut off all unnecessary expenses and try to minimize any spending that you can. If you can get that six month savings to last you six months, you're probably going to bridge the gap and get back on your feet.
Not having an emergency fund can result in terrible repercussions. For instance, missing your house payment will result in additional fees, setting you further back than before. Not being able to pay a car payment (if you took out a loan for a car) hurts your credit. Missing any payment results in late fees. Additional fees, damaged credit, and falling behind are all contributing ingredients to the recipe for disaster. That kind of setback really hurts any goal for financial freedom and generational wealth.
Make a goal to build an emergency fund. Sit down and determine what your fixed expenses are. List those expenses and then mark off any that can be cancelled if the need arises. Then, list off all your variable expenses like electricity, water, food, and gas. Try to arrive at a reasonable average and add those expenses to the fixed expenses. Now, add in a buffer of around 5% and make that your final goal.
You may find that your goal is ridiculously high. You might be discouraged that you'll never hit that magic six month total. If you can't see yourself hitting such a far off goal, then you need to play the psychological game: set a realistic goal so you'll have the satisfaction of achieving it. Then, once you've achieved that goal, set another, realistic goal. You can do this with percentages of your total amount. Instead of six months of savings, go with two months of savings or about 30% of your goal. Maybe you can only swing 20% of your goal. Whatever it is, make something that you can obtain that gets you on the right track.
At the moment that your paycheck is deposited into your account, have an automatic transfer set up to move a specified amount of money to a savings account. Any savings account that gives you easy access when you need it will do. Just do it and make sure you stick to it.
By transferring money the moment it comes in, it won't sit in your account, asking to be spent, but leaving it somewhere accessible will ensure that you aren't reluctant to use it when an emergency comes along. Down the line, when something actually does happen, you'll be grateful that you planned to weather the storm. Storms happen and the sooner you realize that, the better off you'll be.
How do you manage your emergency fund? Thinking about getting started with your emergency fund? Have additional thoughts and insights? Let me know in the comments.
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