An emergency fund is the first real financial checkpoint that many of us will encounter when approaching financial independence. Financial independence is the point when a person has saved & invested enough money to cover their living expenses without relying on their paycheck.
An emergency fund is the first checkpoint on this journey because it is the point where you no longer need to rely on a paycheck to cover an unexpected emergency or jobloss. A twelve month emergency fund is the gold standard in this game, as it means you have twelve months or one years worth of savings to cover your expenses and are unable to find a new job for up to a year.
This may seem like a daunting goal to reach if you’re just starting out but have no fear. You don’t need to save one years worth of expenses right away. A one month emergency fund is a good bare-minimum benchmark to strive for as you get started before you move on to other financial goals, on your way to your years worth of savings. Here are a few tips to help you get started.
It’s time to get down and dirty on the road to financial independence! It’s time to see where your money is going every month. To do this, log into any and all of your banking and credit card profiles. Pull up the most recent monthly statement and analyze. Note anytime you see a recurring bill or transaction. For now we’re going to ignore any one time discretionary spending and focus solely on the payments that have to be made every month for your life to run smoothly.
These payments should include things like payments to the gas company, the electric company, rent, groceries, gas money, car payments, etc.
Once this is itemized, add up all the figures until you get one monthly total. This will be your monthly expense value. The cost of keeping the lights on and the world turning smoothly every month.
Now that you know the cost of your monthly expenses, its time to see if there is anything in this list that can be eliminated. What can you live without? If you lost your job tomorrow, would every single expense you highlighted be a necessity or are there some expenses that can be trimmed.
This is when you trim the fat. Sometimes our lives can become bloated, and the number of monthly recurring transactions coming out of our accounts can exceed what may be absolutely necessary. Trimming these line items from our tally means that your emergency account will only account for the bare essentials, but it also means that hitting that number will be a lot faster than if it was artificially inflated with monthly discretionary spends.
Finally with your monthly expenses in tip top shape, you now know the value of your bare-minimum emergency fund. The price you’d pay to fund your life for one month. Rather than moving money into a high yield savings account every pay check, to build your emergency fund effectively, you need to automate this task so it happens without you even having to think about it.
Calculate how much you can spare from each paycheck and set up an automatic transfer either coming from your paycheck directly or from your checking account once your paycheck has been deposited. This amount should go automatically into your high yield savings account to start building your little bit of financial security on your way to financial independence.
With the beginnings of a bare minimum emergency fund in place, you are well on the road to financial stability. When you have saved one month of expenses, you can begin to tackle some of the other tenets of financial independence like paying of high interest debt and investing. Remember this is a marathon not a sprint, so don’t get discouraged by slow progress. These wins will compound over time. All you have to do is get started.
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