Our hearts are with those affected by the devastation left by the Oklahoma tornadoes. While this post is focused on building up your own emergency fund, there are certainly victims in Oklahoma who could use help in the wake of this very real emergency. If you feel so inclined, visit the Red Cross website to find out how you can help.
For this post we’re getting back to basics. Today’s topic is one that many of you may already understand. While Johnny and I are fortunate enough to be out of debt, we realize debt is a reality for many. And so we’d like to share one of the tools that helped us slay the Debt Monster.
We never fully appreciate the phrase “save for a rainy day” until we’ve actually been caught in a downpour. At times in our lives, Murphy’s Law seems to be annoyingly present in our day-to-day existence. Sometimes “when it rains it pours” is true in the worst way possible. The thing is, hard times don’t last forever and eventually the sun shines through and dries you off. But wouldn’t it be nice to have an umbrella during such times? It wouldn’t stop the rain, but it sure would help protect you from the worst of it.
And now I’m done with metaphors, I promise. And it’s time to introduce my friend, the Emergency Fund. When Johnny and I were paying off our debt, we started with a $1000 emergency fund. And while a thousand dollars is nothing to scoff at, it wouldn’t have done much if we had run into a really serious emergency, such as a job loss or medical emergency. So once we had paid down our debt, it was time to save up three to six months’ worth of expenses in an emergency fund. This is yet another teaching in Dave Ramsey’s The Total Money Makeover. Don’t act too surprised. When it comes to the basics, we’re very loyal to Dave. But Dave’s certainly not the only financial shepherd that preaches this principle. So how do you go about calculating an emergency fund?
Well, in short, it’s different for everyone. Well that’s not very helpful, Jobees. Actually, you would never call me that… unless you’re my mom or someone who had my seventh-grade email address (jobees something-or-other @ hotmail or aol or juno or something). I will forgive your erroneous thinking because I actually do have some helpful stuff to share. Although calculating an emergency fund is different for everyone, the basic question is the same: If I lost my job today, how much money would I need to live for three to six months? And here are the variables:
- Will you save up for 3, 4, 5, or 6 months? Our answer: Do what you can. But remember, your emergency fund is not something to skimp on. But if you can only save up for three months, that’s still a whole lot better than $1000 — or $0.
- Will your calculations be based on losing one income or both incomes? Our answer: It’s up to you, but if you choose the one-income scenario, make sure it’s the higher income. Even if you’re certain that income will never be lost, do it anyway because nothing is certain. Fire and brimstone! Debbie Downer! But seriously, do it.
- What needs will you include in your calculations? Our answer: You can make it as bare bones as you want, but less isn’t more in this situation. If a financial emergency presents itself and you’re able to move in with family and spend nothing on food or shelter, more power to you. But we suggest planning as if you won’t be getting any help. In other words, calculate how much your life costs each month sans discretionary spending.
So that’s why everyone’s calculations are different. And here’s how Johnny and I did it:
- We chose to save up 6 months’ worth of expenses for our emergency fund.
- We calculated our expenses as if both of us had lost our jobs.
- We added up all of our expenses sans discretionary spending. In other words, we included grocery, rent, utilities, etc. What did we leave out? Personal spending, entertainment, church tithing (since 10% of $0 = $0), etc.
Based on our calculations, we needed to save up about $2500 for every month of our “emergency.” So we needed about $15,000 for six months. And just to be on the safe side, we added a few extra thousands to that number. No skimping, remember?
When we were in the process of slaying the Debt Monster, we never thought we’d be able to save enough for an emergency fund. And for a long time, all we had was that $1000 sitting in a savings account. This isn’t something we were able to do overnight. But we’re glad we have it. As is the case with most personal finance topics, our way is our way, and that means it’s probably not the right way for everyone. So take some time to figure out what will make you feel secure should an emergency arise.
And that’s how you get started with a long-term emergency fund. Have you started saving for an emergency fund? How did you calculate how much to save for your (hopefully always hypothetical) rainy day?