Our friends from Young & Free Indiana gave the best tips on starting an emergency fund. Since it's something I still need to do, I will share with you how-tos of starting and emergency fund.
When it comes to money matters that are super important in life, an emergency fund is pretty crucial. A commonly suggested amount in that emergency fund? Six to nine months worth of your income. SIX TO NINE MONTHS WORTH OF MY PAY, WHAT?!?!
Crazy, I know. But, I've also learned that younger people, especially those who aren't married, aren't parents, and aren't homeowners, can feel pretty darn safe with three months worth of income stored away in case of emergencies.
What kind of emergencies am I talking about? Well, anything unexpected, really. You never know when you might have to undergo a major surgery, or when your house might need some pricey repairs, or when your car might break down and cost you an arm and a leg and your firstborn son to repair. And instead of panicking when those unexpected emergencies come up (I'm hoping they never, ever do, but let's be real here) and looking for solutions by taking out loans or racking up the credit card, you're likely to feel way more at ease by dipping into a savings account you've already built up.
TAKE A MINUTE TO SEE HOW MUCH YOU SPEND ON THE REGULAR
Everyone is going to need a different amount of funds to last them the same amount of time. So, sit down and write out each cost you're absolutely tied to each month: rent, insurance, utilities, and so on.
Then, consider how much you spend on more flexible costs each month: entertainment, car fuel, eating out, clothes, and so on and so forth.
Add them up and get your average monthly spending right there in front of you. Say you spend about $1,000 a month on everything. Just to live. That's without any costly emergencies! Now imagine a month with a basement flood or totalled car. Yikes!
CONSIDER YOUR INCOME
Then, figure out how much income you've got coming in per month. Let's say you're making $1,200 a month - multiply that by 3 months, 6 months, or 9 months. At the least, you'll want to have about $3,600 in an emergency fund - three months worth of income. If, as mentioned above, you're spending about $1,000 a month on the cost of living, this amount will get you by for about 3 months.
DEFINE "EMERGENCY FUND" FOR YOURSELF
Sit down and consider the "emergencies" that will allow you to withdraw from the account. Obviously, situations like a house fire, totaling the car, or losing a job are all pretty devastating blows to finances and will require some extra money until you can land back on your feet. But others situations aren't so black and white. For some, repairing the fence in the backyard isn't necessarily a life or death situation, but for others, it is. For some, a ding in the bumper is no big deal, for others, it's huge. Figure out what "emergency fund" means to you and stick to it.
START A SEPARATE SAVINGS ACCOUNT
Head to your financial institution and explain that you're setting up an emergency fund savings account - make it separate from your regular checking and saving accounts, that way you're not tempted to withdraw from it on a rainy day shopping trip.
It's okay to start small and build up. Add a few dollars here and there. Toss your tax return in to get it started. Whatever you want to do to get it in a good spot for you. Hopefully, no emergencies will come your way from the get-go and you can get a pretty hefty amount built up before you ever have to touch it.
CREATE ADDITIONAL BACKUP PLANS
Having an emergency fund is an awesome start to planning for life's unexpected twists and turns, but it's also a good idea to have an additional Plan B. For instance, when you're figuring out your monthly spending habits, determine where you could cut costs if you had to. Buy generic instead of name brand? Eat at home more often? If it came down to it, could you move to an apartment with lower rent? Sell some of your high-priced treasures? Ask a friend or family member for a place to crash or a personal loan?
Take a day (but not more than a day, because then it would just get downright depressing) to think of all of the worst-case scenarios that could happen to you at this very point in your life and come up with a plan on how you'll get through financially! And don't forget to be sure you've got everything insured, too - just in case!
Hope this helps,