With so much uncertainty in the world at the moment, it is super important to make sure you are prepared for anything. It is so easy to roll through life, day to day, blissfully unaware of what challenges might be just around the corner.
That’s why it is so important to have an Emergency Fund set up.
An Emergency Fund of money is one of the best ways to prepare yourself for anything life may throw at you. Not only will it help you cover any unforeseen emergency, it will also have a huge impact on your wealth and your life. It will, in fact, be your first steps to your financial freedom – but more on that later…
For now, let’s just focus on getting started with your own Emergency Fund. And the good news is that it is super easy to do!
Let me explain…
What is an Emergency Fund?
In simple terms, an emergency fund is a bucket of money you can fall back on in times of need. When those unexpected bills pile up, or something goes wrong in life, you have an emergency pot of money to draw down from.
You know, those times when you are left with that sinking feeling of ‘how the f#$k am I going to pay for this?!!!’
But over time your emergency fund will become so much more! I like to say that creating your emergency fund will actually become your own growth fund. It will, in fact, become your first step toward financial freedom, as I explain in my blog post here.
Money is the Biggest Form of Stress
When we are first rudely forced into adulting, one of the biggest and toughest wake-up calls is the lack of money. Although our parents try to teach us the value of money, we never truly get it.
As adults, we are always concerned with how much we have (or don’t have) and where the next dollar might be coming from.
And it never goes away!
Research shows that over 70% of us stress about money every single month, often every day! For some people, every waking moment is consumed with where the next dollar will magically drop from.
Right now, we are living in very uncertain times. The cost of living is increasing, housing prices are escalating, and the global economy is very unstable and challenging.
This all goes to show us that nothing is for certain and how fragile our lifestyles really are. Good times never last forever, and we need to be prepared for the uncertain times…by having our emergency fund set up and ready.
How Can an Emergency Fund Help?
Imagine having a pot of money that you can reach into whenever you need it. Anytime something unexpected pops up, you have it covered.
Things like…
Financial Security: An emergency fund serves as a safety net to help you navigate through unexpected financial crises, such as medical emergencies, unexpected home or car repairs.
Job Loss: If you lose your job unexpectedly, having an emergency fund can provide you with a financial cushion to cover essential expenses while you search for a new job.
Medical Expenses: These can be really costly, even with insurance. An emergency fund can help you cover medical bills that may arise due to unexpected health issues.
Car Repairs: If your vehicle breaks down unexpectedly, having an emergency fund can prevent you from relying on credit cards or loans to cover repair costs.
Unforeseen Expenses: Life is full of unexpected events, such as a family member’s sudden illness, travel due to an emergency, or other unforeseen situations. An emergency fund provides the financial flexibility to deal with such circumstances.
Avoiding Debt: This is a big one! We are so used to defaulting to using our credit card to pay for unexpected bills. This only forces us to pay high interest (think 15-20% plus), making the impact of the expense even worse!
I think you can see how an emergency fund can start to save you money in the long run.
The Steps to Build Your Emergency Fund
Ok, so let’s get started with my 4 simple steps to building your own Emergency Fund.
First Step – Why?
Creating your own personal growth fund is actually quite easy. The process is not hard at all. But it will require some sacrifices, compromises, and dedication to the cause.
So unless you know why you are doing it, it will be very hard to stick with it. You need to know the future you want and the current circumstances you want to avoid.
This will be different for everyone – it is so important you take the time to know what it means for you.
And to get you started, here are some positive ideas to think about.
Reducing Financial Stress: Having an emergency fund can alleviate stress by providing you with the means to handle even the most unexpected situations.
Peace of Mind: Knowing that you have a financial safety net can provide peace of mind, allowing you to focus on and grow other aspects of your life.
Grabbing New Opportunities: An emergency fund can also open up opportunities. For example, if you have funds readily available, you will be able to take advantage of new investment opportunities.
Your emergency fund not only allows you to weather financial storms and unexpected challenges – it’s a foundational step toward building a strong and secure financial future.
Second Step – Where Does Your Money Go?
This is such an important step – you simply must know how much money you spend and where it goes. I am always amazed at how few people actually know this. They know the money is gone, they just don’t know where!
You need to stop the leakage!
What do you spend your money on every month? How will you know how long your emergency fund will last unless you know how much money you spend each month?
For at least one month, write down every single expense you have – every single dollar spent. You will be shocked when you sit down at the end of the month and review it!
We still do this now, even though we have long reached financial freedom. It has become such a habit, and it helps us know that we are keeping our spending within our longer-term financial goals – no matter what happens.
Third Step – What Can You Do Without?
Now you know where the money goes, here’s the tricky part – what things are you willing to cut back on? These are the things where you can save money and put that towards your emergency fund instead.
These are the compromises you will need to make now, to have the future you want later.
If you have completed step two correctly, you already have a list of things you spend your money on. Spotting the things you don’t really need, and can ‘turn off’, should become obvious – if you’re completely honest with yourself!
Do you really need all those streaming services? How about that gym membership that you never use (go for a walk on the beach instead)? What monthly subscriptions do you have that you could do without?
Probably one of the biggest expenses for most people will be eating out and takeaway. Remember Uber Eats is uber expensive! And all those long macchiatos really add up! Eat home more, take your lunch to work, and restrict the number of takeaway coffees!
Don’t be lazy and stay with your current service providers. Shop around and you will find discounts on most monthly bills – from phone plans and internet, to power, insurance, etc. Every dollar saved is another dollar to your growth fund without changing your current lifestyle.
Just remember, when you stop spending your money on these things, you will soon forget they are gone. But your future stress-free self will thank you!
Fourth Step – Make it a Habit
Now you know where you have a little spare cash to save, you need to make saving it a habit.
You need to see this money as a regular monthly ‘expense’ – meaning that you accept it is already gone. It’s not there to be spent on ‘treats’.
If you can see this money as just that, an expense that you need to pay every month, then it is much easier to put it aside and forget about it. Just like paying the electricity bill, it becomes a habit.
And if you’re really clever, you will increase it over time. When you get a pay rise, don’t simply increase your living costs like most people do. Take a reasonable portion and add it to your emergency fund.
Before you know it, you will have at least six months’ living expenses saved. So why not keep going? Don’t stop at six months, now you have the habit locked in. Make it twelve months, then two years!
If you do this, you will be well on your way to financial freedom, without even knowing it!
How Big Should Your Growth Fund Be?
We now know what our living expenses are from Step 2. So, as an absolute minimum, it should be three months’ living expenses.
But here’s the big question – how long do you want to be able to live stress-free?
Let’s say you lose your job, how long would it take to find a new one? What if you had to retrain yourself to find a new job? How long would it take now?
I believe you should have at least six months for better peace of mind.
But you shouldn’t stop there. Imagine having 12 months, or even two years covered. Imagine how you would feel knowing that you could live for two years with no income should you need to.
Now we are talking real stress-free living!
What’s Stopping You?
Like I said earlier, there is nothing difficult about this process. Identify where you are spending your money, cut the stuff you don’t need, and save the rest.
So what is stopping you from starting today?
Just imagine when your emergency fund is set up and in place, and you no longer have to worry about money so much.
Your life will start to lead you in amazing directions that you never knew existed.
If you want to see how you turn your emergency fund into your growth fund and financial freedom, then check out my blog post on your first steps to financial freedom.
So start today and remember – you have absolutely nothing to lose by doing it, and everything to gain!
Until next time…
Leave a Reply