Let’s face it. Shit happens. Your car breaks down. You slip and fall on ice and have to take an ambulance ride to the hospital. Emergencies happen and we must be able to pay the price for them when they occur. Hopefully, they do not occur often.
Any personal finance advisor will tell you that you need to build up a separate emergency fund savings account to use if some unexpected expense occurs. The E-fund should only be used in true emergency situations. A huge sale on shoes at the mall does not count (sorry ladies). I’m talking about a roof leak, a major car repair, a medical bill, etc.
Many personal finance advisors will argue how much you should save in your E-fund. Lynnette Khalfani, author of Zero Debt for College Grads, suggests starting with 3 months’ worth of your monthly living expenses. Suze Orman in The Money Book for the Young, Fabulous & Broke, suggests starting with 3-6 months’ worth of living expenses. On her website, she now suggests 8 months of living expenses. Some people suggest just a $1000, especially for those of us who are in our 20s.
Personally, I believe that everyone sure have at least a $1000 in a separate bank account for emergency purchases only. Once the minimum is saved then I would suggest building up to 6 months of living expenses. In today’s economy and job market it is vital to have enough money built up to afford to live if you lose your job tomorrow. I recently read that the average job hunter will spend about 6-7 months looking for a job depending on their desired job market and skills.
It is important to have enough funds to pay for the bare basics, such as housing, food, medical insurance, and gas/car payments. If you find yourself without any income for extended times then you can (and need) to cut back on a lot of the extras, such as cable, Netflix, shopping, etc. in order to survive.
A well-stocked E-fund is not going to occur overnight for most people. It is something that a person needs to save and contribute to on a regular basis over time. My goal is to build up to an E-fund of 6 months of living expenses. To calculate how much that would be, I first went back to my basic budget that I created in my excel spreadsheet. I looked at my hard expenses (i.e., rent, cell phone bill, student loans) and my soft expenses (i.e., food, gas, gym, etc.) to determine what my monthly living expenses were totaling. I’m a person that would much rather overestimate when it comes to my bills and budget so I know I have a little flexibility in my budget in case I go over it. Khalfani suggests making a budget and then adding 20% to the total because most people underestimate their monthly expenses.
I know if I was to lose my job tomorrow, I could eliminate such things as my Netflix and YMCA membership as well as put my student loans into forbearance if I absolutely had to (I don’t suggest doing this unless its comes down to being homeless and hungry). I calculated my monthly living expenses including the extras and came up with a value of $1100 per month. Thus, I am aiming for about $6600 in my E-fund.
If I wasn’t saving up to buy a new car in mostly cash at the end of the year, I would most definitely make my E-fund the priority. However, I decided to spend the next 3 years building up my E-fund. I broke my big goal of a minimum of $6600 into 3 smaller milestone goals:
- End of 2014 – $1500
- End of 2015 – $3500
- End of 2016 – $6600
I did this for several reasons. The main one being that I have multiple financial goals that I am working towards over the next 3 years. My #1 priority goal in 2014 is to save between $6000-$7000 for a new car. In 2015 my main goal is to pay off the purchase of the car and also to contribute more to my E-fund. In 2016 my main goal is to build my E-fund and pay off my SallieMae loans.
I have further broken down each goal into monthly payments to make it easier for me in the long run. Monthly payments look like:
|Year||Current Balance||Target Balance||Monthly Contribution|
Note: I started off 2014 with a balance of close to $800 in my E-fund from 2013, thus I am contributing less at the moment each month because of my effort to save more for a new car. I am currently contributing about $65 a month to the E-fund.
As you can see, it makes it easier to break your big goals into smaller goals over time. You don’t need to contribute much at the beginning if you truly can’t afford it (I’m talking to you poor recently graduated college grad with a boatload of student loans!), but at least start with something. Even $10 a week can help in the long run.
My suggestions for saving for an E-fund:
- Start with a minimum of a $1000 and then work towards at least 6 months of living expenses
- Break your ultimate big goal into smaller milestone goals
- Use your budget to determine your average monthly living expenses and then to calculate your 6 months E-fund goal
- Save your E-fund in a separate bank account (I prefer using an online bank account, such as Barclays, instead of my normal Credit Union account to take away the temptation of using that money for non-emergencies)
- If you use your E-fund for valid reasons (or not valid reasons), you need to make it a priority to replace the money you used
- Start small and contribute often to make it a habit
- Credit cards should be used as the last ditch effort for an E-fund payment
Do you have any suggestions and/or advice for saving towards an E-fund? What do you think the average E-fund amount should be?