Step 16: Start an Emergency Fund

Step 16 of the 100 steps mission to Financial Independence: Start an Emergency Fund
Step 16: Start an Emergency Fund

No matter how organized you are and how carefully you have planned and budgeted for the next month, there will always be surprises that come up and hit you financially at unexpected and often inconvenient moments: a car maintenance or fix that you hadn’t planned for, a plumbing issue that needs immediate attention, a sudden vet bill for one of your pets or your washing machine that suddenly breaks down. I am sure you can think of many occasions and examples that could suddenly happen and throw you off-track.

If you don’t expect an expense to come up, often times you won’t have the money available, and you will either be forced to borrow money, eat into your savings or cut out money elsewhere.

In this step you are going to set up and build an emergency fund, in which you have a certain amount of money put away that you can use in case of these unforseen but needed expenses that come up. In that way you don’t need to worry about scraping the money together, you can just pay the bill and get on with your life. A good amount to aim for is generally $1000 or the equivalent in your currency. Whenever you take money out of this account, you aim to get it back up to the $1000 as soon as possible afterwards.

Remember that in step 14 you set yourself the goal of limiting one expense for a whole month and keeping track of how much you save. At the end of the month, the money that you saved there will go directly into this emergency fund. Whether that is $100, $50 or just $10 doesn’t matter. The most important point is to start getting money together for this fund, so that unexpected expenses no longer throw you off-balance.

You want to aim to get to your target as quickly as possible, not only to have the security of having the financial cushion in case some unexpected expense comes up soon, but you also want to get this out of the way as soon as possible and move on to your next goal.

You might only need a few weeks to get to your target of $1000, but it might equally take you a few months or more than a year to get there, that’s okay. You will find that once you have started your fund, it will become easier to keep adding money to it, and even if you start with $10 now, you might be able to increase this with time or in certain months.

Then one last point to finish off with before we get to our plan of action: this is an EMERGENCY fund. Don’t touch it unless it is an emergency. That great trip that your friend invites you to but that you don’t have any money for? That’s NOT an emergency. Wanting to buy a new outfit for the wedding you’ve got coming up? You guessed it: not an emergency. It might be tempting at first not to touch that money, but when that emergency comes up you will be incredibly grateful for having that fund available to deal with it.

Step 16 – Start an Emergency Fund – in detail

  • Open a new bank account for your emergency fund. Your fund should be separate from any other accounts that you have, although it can of course be with the same bank you are already with.
  • At the end of each month, add the money that you saved by limiting 1 expense to this account.
  • Decide each month whether you can limit another expense to add that money to it too.
  • Have another look at your income and expenses and decide how much you can standardly pay in monthly to this account, apart from the money we’ve mentioned that you save by limiting one specific expense. Can you commit to another $10 or $20 by just taking down your general budget by this amount?
  • Set up an automatic payment of that amount at the beginning of each month to make sure you keep adding to this account continuously.
  • Look for other ways to add money to this fund even quicker: spare cash you have, money that is sitting in another account that you don’t need, selling stuff from your basement or attic that you no longer need etc.
  • When you finally reach your goal, stop paying into this fund and move on to a new financial goal.
  • Only when you find yourself in a situation that you’ve had to use some of this money for an emergency, you set up a new plan to replenish the account back to your target amount again.

Once you’ve got your emergency fund sorted, this adds a tremendous amount of peace to your life, as you know that for those unexpected bills, you now have the flexibility to deal with them without upsetting your entire finances for weeks or months to come.

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