When you’re a kid, you are taught how to deal with emergency situations. Your parents teach you to dial 911 if something terrible happens. Your school makes you exit the school and line up quietly outside to practice in case of a fire. But maybe you were never prepped on how to handle a financial emergency.
So what happens if you lose your job? Your car breaks down? You have some unforeseen medical bills? Now it doesn’t look like you’ll be able to pay rent or buy groceries this month. Do you run to mom and dad and ask to borrow money? Maybe you have a credit card that you decide to put all your expenses on. Don’t do it! What you could really use is an emergency fund.
In college, Jacob and I took Dave Ramsey’s Financial Peace University class. If you’re looking for ways to get to financial freedom, I would recommend taking this course. The first baby step that Dave talks about, even before paying off debts, is the emergency fund. He says that you should have $500 to $1,000 (that you don’t touch) in the bank in case of an emergency.
We totally agree with keeping an emergency fund, but we keep a little bit more. Looking at Dave’s $500-$1,000 as a good idea for a single person, we decided to do more since there’s two of us. We keep $3,000 set aside in case of an emergency because living in Portland, $1,000 wouldn’t even cover one month of rent. Also, my car is pretty old so if something were to happen to it, we would have to plan on just getting a new one.
When you’re looking at getting together your emergency fund, I would take the time to sit down and think about the amount that would be enough for you. $1,000 is a good start-especially if you’re single-although it wouldn’t be a bad idea to list out all your expenses for one month, and save that amount.
But how do you save up this amount of money?? It can be a very daunting task if you are in college not making much money, or recently graduated trying to keep up on bills. My advice is to take it one month at a time. If you plan on getting that emergency fund to be $1,000, divide it up by 12 months. That makes it to be almost $84 a month, which sounds a lot more doable! That’s just a few restaurant meals a month. If you can cut back on extra costs that aren’t necessities and can add that into your emergency fund, you’d be surprised to see how quickly that money will add up.
I graduated college May 2nd and our wedding was planned for July 18th, so my parents were gracious to have me living in their house for a few months during that time. I had a job right out of college, and with no living expenses, I was able to save up a personal emergency fund of $1,000 very quickly. If your parents are willing to let you live at their place after college so you can save up, be very thankful! It was a huge blessing to Jacob and I as we lived with our parents for a little bit of time between college and the wedding.
Once we were married, we continued to put more to our emergency fund by adding a little bit each month until we reached $3,000. We didn’t go out to restaurants or do much else, but we were able to quickly reach our emergency fund goal.
So what should you use your emergency fund for? An emergency fund is for unforeseen expenses. This can include car repairs, medical costs, or every day expenses if someone loses a job. The key word here is unforeseen. No, this does not include a new pair of shoes you just have to have or a fancy new smart phone. Also, Christmas presents do not constitute as an emergency, as this is something that you knew was coming all year. These sorts of fun things that should be included in your every day budgeting.
The truth is, the future itself is unforeseen and you have no clue what tomorrow will hold. An emergency fund will help you to be more at peace about the unknown, and will help you to get going on your path to financial freedom. For Jacob and I, this was the first thing we knew we had to do so that we wouldn’t feel extremely stressed if something unknown were to happen. So far, we haven’t had to use it, and we hope it stays that way!
So start saving! Cut back on things that aren’t necessities and put it to that emergency fund. Saving today will mean that you get to enjoy more in the future!