Personal Finance 101: Build an Emergency Fund

In this personal finance 101 series I am going to focus on why all Millennials need to establish an emergency fund. The general consensus from virtually all financial experts is that you should save between 3-6 months worth of living expenses as your emergency fund, aka your “rainy day” fund.

How Much Should I Have In An Emergency Fund?

Unfortunately, most American’s have less than $1,000 in savings. According to MarketWatch, more than 60% of American’s have less than $1,000 set aside for an emergency fund. And more than 20% have no savings account whatsoever. So unfortunately most American’s can’t afford what life throws at them; car repair, water heater, ER visit, etc. Let alone a layoff!

As I stated earlier, I believe most Millennials should have 3-6 months living expenses set aside as their emergency fund. That number does vary based off your current situation. Is your job stable? Are you salaried or self-employed? Are you single or do you have dual income? Everyone’s situation is different. But if you have a stable job that you feel very secure in, then I think you are correct leaning towards the low end of 3-months living expenses. But if you are self-employed and your pay varies based off contracts/work, then you should absolutely skew higher on the emergency fund side and aim for 6-months.

Do You Have $400 for an Emergency?

I was recently listening to an episode of Motley Fool Answers, one of my favorite money podcasts for Millennials, and they too were discussing how most American’s don’t have enough money in savings to cover a $400 emergency. This was actually a study done by the Federal Reserve, and it wasn’t just for low income families, as it even applied to families with a $100,000 income.

That is just terrible. And I am sure most people don’t think they need it because they can simply put an emergency expense on a credit card. Says the person who probably has a boatload of credit card debt, I’m assuming…

How Much Is In My Emergency Fund?

I am a Millennial and I am married with one child. I personally have 5-months of living expenses in my emergency fund. I am salaried and in a very secure position with a very stable company. My wife, however, is self-employed but her income has been consistently stable for the last decade. We also both max out Roth IRA’s each year. I have no intentions of using these for an emergency, but they are there just in case. Especially my Roth IRA because I already have a well funded Roth 401(k) at work, with a healthy company match.

To be honest, my wife and I never really established an emergency fund until about 2 years ago. I started getting hooked on Dave Ramsey and we began to budget and manage our personal finances much more diligently. We now have no debt, other than our house, and a fully funded emergency fund. The peace of mind we’ve had the last couple years because of this emergency fund is indescribable. We sleep better at night and we rarely stress out about money. It is a fantastic feeling.

Emergencies Happen

Just this past summer, our emergency fund saved us from some major stresses. It May we had saved up to re-sod our backyard, which costs us $2,500. Big hit, but we saved up for it. But then life hit and our emergency fund got taxed. In June our hot water heater went out and that costs us $1,200. Then in July our garage door broke and we had to replace that, which costs us another $600. August was light, thankfully, but then in September my 10-year old SUV needed some work; rear brakes and a new sway bar. That too was another $600.

Our fully funded emergency fund saved our bacon big time this summer. We were able to take from there, then replenish. But then we were hit again. But we again replenished our emergency fund.

On this same note, I recall reading a number of stories about Houston families and residents who were unable to evacuate prior to Hurricane Harvey making landfall on August 25, 2017. It saddens me that so many people not only didn’t have an emergency fund, but they had virtually no money in savings to get their family to safely. I read a few stories that since the storm hit at the end of the month the family was out of money, because they obviously live paycheck to paycheck. Gas, hotels, meals and safety wasn’t an option for them at the end of the month.

Stories like this should be a teachable moment for us Millennials. Save for an emergency…and save aggressively now. Stop putting it off.

Did you know that if you saved just $25/week for 2 years you would end up with $2,600. If you can triple that to $75/week you would end up with $7,800. Now that probably doesn’t fully fund your emergency fund, but its a great start with very doable, and very conservative savings amounts.

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