One of the most important things you can do for your financial future (and your mental health) is to save for a rainy day fund, aka an emergency fund. In fact, if you’ve paid off all your credit card debt, then this should be at the top of your financial to-do list.
I know, I know, saving for a down payment or a vacation (or just about anything else) is more exciting than being prepared “just in case.” But having money socked away means you won’t need to use your credit cards should any surprises happen. And the one thing you can count on is that surprises will happen. Cars need fixing. Roofs leak. Computers break.
Having an emergency fund isn’t just about protection from credit card debt. It’s the insurance that whatever life throws at you, you’ll be prepared to handle it without having a money meltdown. It can also empower you, since you’ll know that if any situation becomes untenable (your job or living situation, for example), you’ll have the resources to change it. In that way, consider this your “Peace of Mind” fund.
Whatever you decide to call this savings stash, it should be worth around 6 months of living expenses—for necessities such as rent or mortgage payments, groceries, and utility bills. You don’t need to include frills like entertainment or dining out (however if you’d like to know you’re covered, you can set your bar a little higher). If you’re a freelancer, or if you feel like your job is especially vulnerable, you should aim to save up more. But having even one month set aside is a great start.
You can keep this money in a bank or a credit union as long as it’s FDIC insured. Remember, you’re not trying to make incredible gains with this money—what you want are safety and access. Figure out how much you need each month by filling out this simple budget worksheet. Then, multiply it by the number of months you’d like to be protected. You should attack this goal just as you would when paying off your high rate debt or saving for new fall boots (you might have to wear last year’s pair ’til you squirrel away for this—sorry!).
If you’re saving up as a couple, or as a family, now is a good time to sit down and have a conversation about how you’ll meet your emergency fund goal together. Talk about how your budget might need to change, and make sure you’re on the same page about cutting down on expenses. Then, once you’ve accumulated enough to cover you for several months, shift the conversation towards your next financial goals, like the down payment or the dream vacation.
Do you have an emergency fund?