Welcome to 31 Days to Organize Your Finances. By the end of the month, my goal is to help you have a detailed financial plan for your family. We’ll talk about cash flow, budgets, debts, and all of the nitty gritty of our finances that might not be fun to talk about, but are so important to discuss. Please refer back to the original post for a complete list of daily assignments.
Last year, our van needed 4 new tires to pass its state inspection and our 13 year old dryer stopped working. The total cost for the new tires and the dryer repair was $900. Oh, and it happened all in one week.
Several years ago, our other vehicle needed new tires to pass inspection and our hot water heater stopped working. Cha Ching $1000…again, all in the same week.
Have you had weeks like that? Where everything seems to go wrong and it is all so very expensive.
Both instances could have brought us down and we could have reached for a credit card, but thankfully, my husband and I are pretty adamant about having an emergency fund and I want you to become adamant about having one too.
A Very Tough Year
There’s a reason for our advocacy. As self-employed owners of a small business, we have lived through some challenging months, but the year 2007 was especially tough for us. Our business became difficult. Every month, our income must cover our business and household expenses, but many months in 2007, our income barely covered our business expenses, leaving nothing left for our household. There were months when our sales were HALF of what we would normally bring in.
I remember one morning my husband and I were sitting at the kitchen table contemplating if we should sell one of our cars. We had a toddler and a baby on the way and our business was heading south–it was a scary time for us.
Had it not been for the money in our emergency savings, we would most likely have used credit cards to survive. We reduced our spending where we could, but the money to pay any shortfall each month came from our emergency fund.
That fund was a life saver, a sanity saver and a marriage saver.
By the end of 2007, our business was picking up again–thankfully–but not before we practically wiped out our emergency fund with only $2000 left to spare, not enough to get us through one more month.
What is an Emergency Fund
Surely unemployment, reduced income or a business downturn is considered an emergency, but so is a leaking roof, a broken hot water heater, or a dead car battery. But a broken TV or the snazziest new phone or gadget…not so much.
An emergency fund is really a safety net. When an emergency happens, you use your emergency fund, instead of your credit card. It is for emergencies ONLY. Your wants and dreams are secondary and need to be saved for separately.
How Much of an Emergency Fund is Right for You?
I am a huge follower of Dave Ramsey. I read his books, The Total Money Makeover and Financial Peace many years ago, but only last year did my husband and I drink his kool-aid and start our own plan. For more on that, read Our Debt Freedom Plan.
As part of Dave’s 7 Baby Steps plan, he recommends pulling together a $1000 starter emergency fund. Later in his plan, he recommends people save 3-6 months salary, but only after they’ve paid off their non-mortgage debt.
My husband and I see things slightly different based on our personal situation. We would not have survived with just $1000 starter fund back in 2007. But we are self-employed and I think even Dave Ramsey would agree that $1000 is not a high enough number for a self-employed family.
If you have a stable job, maybe $1000 is a good number to start. Although, as noted above, $1000 is easy to blow through with emergencies in one week, so maybe a starter emergency fund of $2000-3000 would be more comfortable for you.
Once your finances are in order, your goal should be to increase that number to: three months of living expenses? Six months? One year? Depending on our income source and stability and what we are comfortable with, that number will be different for everyone. Three to six months living expenses used to be what the personal finance experts recommended, but in today’s environment, maybe six months to a year is more prudent. In 2007, we used about 6 months worth of living expenses and our savings came very close to drying up, so saving one year’s worth of living expenses would be more wise for us.
Sit down with your spouse and discuss what level you are comfortable starting out with and GET THERE.
Should you impose strict rules on emergency fund spending?
Absolutely! Don’t confuse this money with vacation money or new furniture money. An emergency fund is not a spending account. Create a separate savings account and call it your Emergency Fund. Be diligent about how you use the fund.
Also, in the case of an emergency and you need to dip into the fund, it must be replenished as soon as possible.
But How Do I Fund the Account?
This is going to take some time. At least get your starter account funded as soon as possible and then plan your strategy for the additional funds. For ideas on finding some money, read 31 Days to Find $1000.
Do you have an emergency fund? Are you saving for your emergency fund? Let us know in the comments.
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