A Beginners Guide to an Emergency Fund
Life can throw unexpected curveballs at any moment, underscoring the importance of having your own financial safety net. Cue the emergency fund – a shield against the uncertainties that come our way. Yet, for many, the concept of establishing this buffer can seem daunting or even elusive.
Building an emergency fund starts with small, purposeful steps. Begin by defining what constitutes an emergency expense – unforeseen medical bills, or unexpected job loss. At Prosperity, we consider car expenses to be inevitable, so we save for them in what we call a sinking fund. More on that in a future blog post! For folks with steady or consistent income, we recommend that you build an emergency fund with three to six months worth of expenses. For folks with variable income (freelancers, self employed, gig economy etc..) we recommend having between six and 12 months in the bank.
Why so much? Mostly for protection against job loss. You want to create an environment where you can breathe if you wake up one day and find yourself unemployed, knowing you can pay your bills and afford groceries. Don’t worry, Rome wasn’t built in a day and your emergency fund isn’t going to suddenly fund itself overnight.
Building an emergency fund is about setting aside a portion of your income regularly, committing to consistency rather than instant accumulation. The most popular and successful way to get to your savings goal is to automate your savings. If you are paid by direct deposit, you may be able to designate multiple destinations for your pay check. Send some money directly to your savings account instead of sending the whole thing to checking. If your budget is tight, start small, saving even $25 a paycheck will grow to $650 over the course of a year on a biweekly pay schedule, saving $100 will become $2,600.
The key to success lies in prioritizing this fund in your budget. Treat it as a non-negotiable expense, almost like paying a bill. Automate transfers to a separate savings account, making it a routine contribution rather than an afterthought. If you can’t automate your savings via your paycheck, do it manually on pay day before the money disappears. While it may seem challenging, every dollar saved brings you closer to financial security and peace of mind.
Remember, the purpose of an emergency fund isn't just to weather storms; it's a testament to your financial resilience. It's a shield against stress and a symbol of empowerment, granting you the freedom to navigate life's uncertainties without financial strain. Start small, stay consistent, and watch your emergency fund grow, providing a reassuring safety net when life takes unexpected turns.
Remember, you got this! If you need help determining how much to save, Prosperity is here to help.
