Video Transcript
Hey, Tammy here. Today I want to talk about emergency funds… which are sounding a lot more interesting now with all the craziness that is going on in the world. We’re going to talk about what an emergency fund is? How much do I need? What do I do with it? What’s an emergency? And any other thing that might pop into my brain.
What is an emergency fund?
First question: What is an emergency fund? An emergency fund is money you set aside for an emergency. That was easy, onto the next one…
How much do you need in your emergency fund?
How much do you need in your emergency fund? You may have heard guidelines (or maybe not) that say you should have 3 to 6 months saved in your emergency fund. So why 3? Why 6? 3 would be more for people that have a more stable income situation, so maybe a two income household or a more stable job. 6 months would be for people that are maybe a single income household, or self employed, or something like that. Now my recommendation is going to be 6 months for everybody because interestingly a lot of people that thought they had a stable job are maybe finding out their job wasn’t as stable as they thought. And if you’re ever in a situation where you need your emergency fund you’re never going to be sitting there going “You know when we needed our emergency fund I really wish we would have had less money and saved less money. We just had too much money in there when we needed our emergency fund”… said no one ever! So I’m going to tell you to put 6 months into your emergency fund.
Now we’ve determined that you want 6 months of expenses in your emergency fund, fine, but what expenses do we actually include. Absolute basics you’re going to want it include your needs, your basic needs, which are food, utilities, housing costs (like mortgage or rent), and vehicle expenses. So you go through that for your family and your house and absolutely set those basic expenses aside. Let’s say that adds up to $4000 for your house… you take $4000 multiplied by 6 months and you get $24,000. This means that in this example you want to have $24,000 sitting in an emergency fund.
Now there may be unique things in your situation that you also need to take into account above and beyond those absolute basics, part of which will be determined based on what you think you want your life to look like if you were in need of your emergency fund. Let’s say you lost your income… what would you want your life to look like? For example, let’s say that your kids are in gymnastics, if you lost your income would you keep your kids in gymnastics or would you pull them out? If you’re going to pull them out, no problem, you don’t have to think about it. But if you want them to stay in gymnastics then you have to create an emergency fund for the gymnastics. Let’s say gymnastics is $500 a month, you would need to take $500 multiplied by 6 months and you would need to set aside an additional $3,000 in your emergency fund for gymnastics. Things like gymnastics might be a little bit different for your family. But at an absolute basic minimum you want those needs in your emergency fund because you could cut some things out, but the things you cannot cut out you absolutely want to have included in your emergency fund.
Where does the money for your emergency fund come from?
Now you might be wondering where does this money for my emergency fund come from? Maybe you just did a calculation that came up with a $24,000 emergency fund… where’s that going to come from?? Most likely that money is just going to slowly, slowly build up over time as you put a little bit of money aside each month until you get to your 6 month emergency fund. Now maybe you’ll get an inheritance that you can pop into your emergency fund, or maybe you’ll get a bonus or maybe you’ll sell something so you can put a big chunk of money in your emergency fund, but most likely this is something that you’re going to slowly build up, month by month, until you have your full 6 month emergency fund.
Where do you put your emergency fund?
Next question is what do you do with this cash that’s going to be your emergency fund? Well there are 2 rules for emergency funds; first rule is you want the money to be accessible, second rule is you want it to be safe. By accessible I mean that you want this money to be easy to get to, so a savings account is great for that. You can transfer money in if you need it, you can transfer it out. It’s easy. Because if you have to call someone, sell something, cash something, or pay some kind of a fee to get this money then you may decide not to do it (or decide it’s not worth it) and then you might turn to debt, but the whole reason we have an emergency fund is so that you will not use debt anymore so you want this money to be easily accessible.
Second thing is that you want the money to be safe. And by safe I mean you want it to not lose value. If you put $10,000 in your emergency fund then you want there to be $10,000 when you need it! So once again a savings account is great for your emergency fund. You put your money in and you know exactly how much you are going to have. If you trying to invest your emergency fund in something and if it went down in value at the time that you needed it, all of a sudden your 6 month emergency fund could become a 3 or 4 month emergency fund and not be what you need at the time. For your emergency fund, put it in a savings account, you leave it, you forget about it, and you hope that you never need it. Put your emergency fund into a savings account, don’t touch it, you’ll thank me if you need it.
When do you use your emergency fund?
When do you use your emergency fund or what do you use your emergency fund for? Your emergency fund is used for some kind of big expense or cost that you could not have predicted would have happened. Like for example, losing your job because of the global pandemic, that is a perfect example of a time to use your emergency fund. Or another example might be if all of a sudden you find out your car needs $3,000 of repair work, and you don’t have any money sitting around, then you want to use your emergency fund for that. And this is the beautiful thing because now you can use cash instead of debt to pay for that emergency that’s going on. And then once life returns back to normal then the next thing you want to do is replenish your emergency fund (put that money back in there), and you’ll do that the same way you build it up in the first place; little by little, month by month, you keep putting money back into your emergency fund until once again you have your full 6 month emergency fund.
Action Step: Calculate your emergency fund
Action step for today: You’re going to figure out what the emergency fund for your family should be. Take out a pen, take out a paper, and play along at home.
Write down “food” and how much per month your family spends on food. If you don’t know for sure just write down an estimate, estimates are OK at this point. Let’s put down $1,000. Next write down “utilities” and how much you spend on utilities. Let’s use $500. Next write down “mortgage” or “rent”. You probably do know this number so write your number down. I’m going to use $1,000. And then last write down what your vehicle expenses are. In my example I’m going to use $400. And then you add those up. We’ve got $1,000 + $500 + $1,000 + $400 is $2,900. I’m going to round that to $3,000. $3,000 multiplied by 6 months and you get $18,000. In this example $18,000 is how much this family would need in their 6 month emergency fund.
Food $1,000
Utilities $500
Mortgage/Rent $1,000
Vehicle $400
Total $2,900 (round up to $3,000)
$3,000 x 6 months = $18,000 emergency fund
Now this number that you just calculated could seem a little bit overwhelming, especially if you currently have $0 set aside for your emergency fund. If you need help figuring out how much you should have in your emergency fund, or if you would like help figuring out how you’re going to get the money to put into your emergency fund, I’d be happy to help. Head over to hyska.com and get in touch with me. Or if you just have a question, head over to hyska.com and write a comment. Or if watching this made you think of some other money question head over to hyska.com and I’ll be happy to answer those questions to. And last, if you think this information would be valuable to someone please feel free to share. An emergency fund can be such a game changer in a family’s life.
That’s it for now.