Saving for a rainy day seems old-fashioned and old-school. That’s because it is, but it’s all the more critical because rainy days seem to happen more frequently in this era. Honestly, it goes all the way back to the Bible.
Today more than ever, having that emergency fund has saved countless people from diving back into debt. Still, more than 60 percent of Americans could not pay for a $1,000 emergency. Many of my clients struggled to get their emergency funds in place. Why? Because so many other fires are burning that distract from the basic fundamentals.
Your emergency fund — just like other financially-motivated tools and practices — is based on biblical principles. Here are a few references:
- “The wise store up choice food and olive oil, but fools gulp theirs down.” ~Proverbs 21:20.
- “Go to the ant, you sluggard; consider its ways and be wise! It has no commander, no overseer or ruler, yet it stores its provisions in summer and gathers its food at harvest.” ~Proverbs 6:6-8.
- “Suppose one of you wants to build a tower. Won’t you first sit down and estimate the cost to see if you have enough money to complete it?” ~Luke 14:28-30.
If it works for ants, the wise, and with tower-planning, it’s probably good enough for you and me.
How much should you have in an emergency fund? Good question. The general rule of thumb is $1,000, but in today’s uncertain times, $1,500 or even $2,000 may be right for you. If your income doesn’t allow for that, or you’re trying to put out other financial fires, start with $500, but get it done. You can add to it later.
Yeah, but where do I get the money for the emergency fund? If you don’t have a total of $1,000, start with what you have. Sell something, don’t go to Starbucks for the next week, put off another purchase. Just do it. You’ll be surprised where you can find money when you really need it. Make your emergency fund a priority.
Where should you keep your emergency fund? Somewhere at arm’s length. In other words, you want to have ready access but not be tempted to use it for everyday expenditures. Here are a few suggestions:
- Savings account. Use your current bank where your checking account is located, or open a savings account at another bank to make it a little harder to access.
- Money market account. Sure, but remember that your emergency fund is insurance, not an investment tool. The interest rate does not matter.
- Cash under the mattress. Lots of people still do this. Cookie jar, shoebox in the closet, underneath the mattress. You can also put it in a safe in your home.
What do you use it for? This is exclusively for emergencies. A sudden car repair, the AC goes out in the house, an ER visit. Something completely unexpected. That means dinner out with friends, Christmas or birthday gifts, a trip to the Caymans, or a new pair of boots does not qualify.
You say, “I need to get out of debt, right?” Yes, but remember, your emergency fund is insurance that will protect you while paying off that debt. Your emergency fund is your first step to getting your finances in order and living the life of your dreams.
If you don’t have the $500 or $1,000, start with what you have. You can sell something; you probably have money laying around you weren’t aware of or simply don’t eat out or go to Starbucks this month. But get it done, and let this be the first gazelle-intense success on your financial journey.
The first choice is to make the decision. Don’t put it off: Start your emergency fund today.
These are the 3 steps to creating your emergency fund.
- Make the decision: “I’m going to do this.” and determine how much you want in the fund.
- Establish the fund. Determine where you will keep it (savings account, under the bed etc.) even if you have to put $5 to start the fund.
- Develop a whatever it takes attitude and start socking away the $$$. (Sell something, consolidate funds, say “no” to something so you can say “yes” to your EF.).
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