Day 8: 30-Day Financial Wellness & Home Ownership Series
You need an emergency fund. I need an emergency fund. Everyone needs an emergency fund. Let’s dive into how we get there in this 5 step emergency fund savings plan.
First, let’s talk about what an emergency fund is and why it’s necessary. I believe in having two emergency fund accounts so to speak. They are funded simultaneously but not necessarily at the same amount each month.
The data on the savings rate in the United States is not good:
“A 2014 Bankrate survey, echoing the Fed’s data, found that only 38 percent of Americans would cover a $1,000 emergency-room visit or $500 car repair with money they’d saved. Two reports published last year by the Pew Charitable Trusts found, respectively, that 55 percent of households didn’t have enough liquid savings.”
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Emergency Fund 1: Short-Term Funds or Variable Expenses
This emergency fund account is to be used to cover unexpected expenses, car repairs, etc. You decide what its best use is for your situation. Use an electronic spreadsheet or worksheet to decide how much goes into this account and assign it a purpose. Remember we talked about telling your money what to do for you.
When those unexpected expenses pop up or biannual insurance premiums are due, it will be comforting to know you’ve already saved up over time and won’t have to take a hit to the other line items on your budget.
This may be the account where you store at least $1,000 as Dave Ramsey suggests and then focus on tackling debt instead of adding more money here.
Emergency Fund 2: Long-Term Funds
Figure out how much you need to save each month to reach a 6-8 month long-term emergency fund reserve. It may take you some time to reach this reserve but the key is to start working toward making this a reality. I’ve heard it taking 3 years for some to reach a reserve and some even longer. Again, this is where your budget comes into play to help you determine how much you can allocate toward this line item every month.
Many financial experts advise you to not work on this account until you’ve paid off your debt. Some advise that you do both simultaneously. As I stated above, Dave Ramsey wants you to at least save $1,000 and then tackle your debt. His thought is that in case of a car repair, you’ll have cash for it instead of adding to your credit card debt for example.
Another financial expert, Suze Orman, says you should do both simultaneously. Save for your emergency fund while making minimum debt payments. Once you reach your 6-8 month reserve, then you’ll start paying more toward debt.
Michelle Singletary, author and finance columnist states:
“Readers often ask whether they should save or pay down debt. You need to do both. If you have no savings and an emergency comes up, you’ll probably push yourself further into debt trying to resolve that financial crisis. But at some point when you have a solid savings balance, which this person has, you can stop saving and focus on paying down the debt.”
Recently, I had been doing both at the same time: saving and paying off debt. I just decided to cancel my savings allocations and send that money straight to debt to pay it off faster. Once that is done, I’ll reset the automatic allocation to my savings account.
I don’t like owing anyone really and I really don’t like having credit card debt so that is something I’m focused on eliminating for good this year.
This emergency fund 2 is only to be used in case of long-lasting emergencies like job loss, illness, taking off from work to care for a sick parent or child, etc. Otherwise, this money is to never be touched.
5 Step Emergency Fund Savings Plan
- Open Up Savings Account
Ok, so we have to at least make this initial step. You’ll be amazed at the number of people who don’t have a savings account. Many are completely unbanked, meaning they don’t have a checking account either and so they cash their checks in stores or check-cashing places.
Even if you start only depositing $10 per week – just start. As you gain momentum, you will feel great and be inspired to save more!
I have several savings pots for different purposes as I stated here. I recently stopped saving to focus on paying off my last bit of credit card debt. Once that is done, then I’ll start back adding to each of these savings accounts though not at the same rate.
The majority of my savings allocation will be saved in the emergency fund 1 account until I reach the goal for that account. The next largest percentage will be added to emergency fund 2. I will then split the remaining percentage between house fund, car fund and vacation fund. It works better for me to separate everything because it gives me a clearer picture of where I’m headed. You may want to do a different strategy.
I also want to add that I do maintain a savings account for my daughter where her allowance is deposited every month as well as gifts she receives. Whether I’m in debt or not, money goes into her account every month and I login often just so she can see her balance growing. Now that she’s 13, I will soon move her account offline so she can walk into the bank branch to deposit her own money. I hope that will give her the motivation to keep up good financial habits. And she’s a saver so I’m on the right track with her!
Finally, I own a rental property and so I maintain a savings account strictly for that property for house repairs and maintenance. Opening up a savings account sets you on the path to building your emergency fund.
- Add a Savings Line Item to Your Budget
When people think of budgeting, they may only think of expenses but this is also where you allocate the amount for savings.
If some of us would take this simple step, we could get set free from so many negative things that keep us in shackles: debt, bill collector phone calls, anxiety about paying bills each month, and the list goes on and on.
Think about what pains you the most when it comes to your money – now imagine yourself set free from that. You can do it with time and good effort. Adding savings to your budget puts you on the journey to building a secure financial future and that starts with your emergency fund.
- Review Monthly Expenses (cut where you can)
Go back and review last month’s expenses or your expenses over a 30-day period. If you’ve started keeping a budget, then you may already know this information and are working on cutting expenses. If you haven’t looked at your expenses, you may be in for a huge surprise.
As I stated here, my biggest issue was eating out. I’ve been doing better over the last month because I’m working on losing weight as well as saving more money for other important line items. So, eating out was definitely an expense to drastically cut for me.
You may have premium cable. But if you have debt, it may be time to let that go and just have basic cable until you pay off your debts, for instance. When working to pay off debt and save, we have to make sacrifices and I know it’s not easy. Believe me, been there and still there.
Other items to take a look at are insurance premiums for your house, car, life, etc. Have you comparison shopped lately to make sure you’re paying the lowest rates possible? Have you looked into using only one company for all of these to get a reduced rate? The same goes for your cell phone. Can you change your plan to a lower rate?
Cutting expenses where you can frees up money to add to your emergency fund savings account.
- Check Your IRS Withholdings
I know this can be confusing for the average person. It was for me for a long time. But simply put, are you getting a huge tax refund every year? If so, this can be money that you receive monthly instead of once a year. You would need to change your exemptions on your documents with human resources or if you work for yourself, talk to your accountant.
If you’re not sure how to do this, it is well worth it to consult with a tax expert or accountant. Wouldn’t it be great to be able to use that money to put toward your financial goals on a monthly basis?
Getting a tax refund every year isn’t free money from the government or a sudden windfall. It’s actually your money that you could have already had access to throughout the year.
Instead of getting a huge tax refund every year, change your tax withholdings so you can receive that money each month to add to your emergency fund savings account.
- Set Specific Goals
Habakkuk 2:2 (KJV)
And the Lord answered me, and said, Write the vision, and make it plain upon tables, that he may run that readeth it.
You may recall we talked in depth about 10 Smart Money Goals. Again, we have to tell our money what to do and not allow it to control us. You have power over your money. Your money does not have power over you.
I heard one finance expert on the Roland Martin show a few weeks back state that if you don’t have plans for your money, someone else will. Don’t let that happen. Plan your future and moreso plan for your present – so you can enjoy life now!
Setting goals for your money will lead you to an emergency fund savings plan and set you on a path to debt freedom.
- *Bonus* Willpower & Dedication
Patience. Sacrifice. Dedication.
When you are ready and focus your mind on what you want to happen in your life, beautiful things begin to happen. The more you put in the time and effort, the more momentum you will gain. As you gain momentum, your desire to do better and be better increases.
Begin this journey. Stay the course. Keep your eyes on the big picture. Financial wellness and peace is yours for the taking.5 Step Emergency Fund Savings Plan #financialwellness #30dayseries #natashavip Click To Tweet
Do you have an emergency fund? If not, what’s keeping you from starting one?
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