If you don’t already have one, a Fully Funded Emergency Fund gives you more freedom and peace of mind than you could ever imagine.
There is a reason so many money gurus suggest starting an emergency fund as your first step towards financial freedom.
In my own Path to Wealth article, building a mini and then a fully-funded emergency fund are some of the first steps towards building wealth.
What is an Emergency Fund?
An emergency fund is simply a savings account where you have enough cash saved to cover all of your basic living expenses for a few months.
If you are just starting out on your financial journey, building an emergency fund should be one of your top priorities.
How Large Should Your Emergency Fund Be?
Figure out how much it costs you to live your basic life, not luxuries like eating out, new clothes, or vacations, just the basics:
- Rent/Mortgage
- Groceries
- Utilities
- Insurance payments
- Medical expenses
- Gas
- Car payment
- Etc.
Once you know how much your basic living expenses are each month, figure out how many months you need to be able to cover.
If you are part of a dual-income family and you can live off of one income, if necessary, then you might only need 3 months or so of living expenses in your emergency fund. Or if you have a job that you can easily replace if your company closed tomorrow., you can get away with a smaller emergency fund.
But if you have a job that would take a while to replace with similar income and benefits, you may want to have a larger emergency fund. Closer to 6 months or however long you think it would reasonably take to replace your paycheck if your company suddenly closed and make you comfortable.
Example #1:
Judy and John have 1 kid and both work, bringing home $50,000 each for a total of $100,000 a year. After taxes, they bring home a combined $6,666 a month.
Their basic monthly expenses are about $4,000.
If one of them were to lose their job, the other could still almost cover their basic expenses, not completely, but almost. And they could both find a replacement job easily enough.
Because of this, they really only NEED about a 3-month emergency fund. So they are building up their emergency fund to:
$4,000 x 3 months = $12,000
Of course, they could save more if they wanted to feel more confident, but 3 months should be just fine and they can begin to invest more sooner.
Example #2:
Paul is a single dad with 3 kids. He earns $75,000 a year. After taxes, he brings home about $5,000 a month
His basic monthly expenses are $4,000 as well.
Because he is the sole breadwinner of his family, he should strive to build an emergency fund of at least 6 months of basic expenses:
$4,000 x 6 months = $24,000
This will definitely take him longer to build than Judy and John’s emergency fund, but once he accomplishes it, he will be able to have so much more freedom with his money and his life!
Emergency Fund Allows Freedom to Relax
When you are living paycheck to paycheck, with no savings, it constantly feels like you’re treading water. Always working to just barely keep yourself afloat.
Having a fully-funded emergency fund is like a life preserver.
Knowing that if something like a job loss (check out my article on Preparing for a Job Loss) were to happen, you’d be able to ride the wave.
With an emergency fund, if you lose your income, you can concentrate more on finding a great new job. One that you will enjoy and earn a good salary from rather than just snatching the first job that comes along because you need to put food on the table.
Emergency Fund Allows Freedom to Invest
Investing in the stock market can cause a lot of anxiety if you watch the market shifts every day. Those ups and downs can feel like a roller coaster!
The average return of the S&P 500 for the last 50 years is about 10%. Even with all the ups and downs throughout the years, long-term investments in low-cost index funds bring real wealth if you’re able to buy and hold without freaking out and selling.
If you are not stable in your current financial situation, the thought of losing any money you invest, even if it’s just on paper (losses aren’t realized until you actually sell) can be traumatizing enough to prevent you from even beginning to invest.
A fully-funded emergency fund can give you the confidence to begin investing in assets that can really make you wealthy.
Knowing that if the market has a few bad days, weeks, or even months, you are still able to cover your expenses, can give you a lot of freedom.
You might want to start investing in other assets, like real estate, or Mr. Bean’s recent Short Term Trading and Crypto. Having the confidence that if something crashes to $0, your family won’t be out on the street, makes it so much easier.
Emergency Fund Allows Freedom to Say No
Mr. Bean’s full-time job is our main source of income and has been for the last 8 years since I became a stay-at-home homeschool mom.
A few months ago, his employer tried giving some of their workers an ultimatum in order to keep their job.
We have about a 6-month emergency fund saved in addition to our Expected Expenses accounts and Retirement Investments.
Because of our secure financial situation, Mr. Bean was able to stand his ground and tell his job “No, he would not take the ultimatum.” While many of his coworkers were forced into a situation they did not want, Mr. Bean called their bluff with the confidence that if he did lose his job, we would be okay.
If we did not have a fully-funded emergency fund, there is no way he would have had the confidence to stand up to his boss. Luckily, it all worked out and he has kept his job.
That ability to stand up and say no was made so much easier, knowing that we had the life preserver we need.
Someone in a similar situation might need time off to care for their children or vacation to attend their sister’s wedding. They’d be hard-pressed to stand up to their boss if they were not confident in their financial situation.
Knowing that you will be okay, even if your boss fires you because you tell them “no”, is a very comforting feeling. Confidence that we should all have.
Emergency Fund Allows Freedom to Try Something New
So often, people don’t allow themselves to try something new for fear that it could mess up the life they have now.
“The devil you know is better than the devil you don’t know.”
What about someone who wants to become an entrepreneur and start their own business? If they have a well-funded emergency fund, they can have the confidence to make the jump, knowing that if the business fails, they will still be okay. (Build a Millionaire Mindset)
Or someone who wants to try living in a new town. Quitting your job and starting over in a place you don’t know is scary. But if you have a well-funded emergency fund, it can give you the confidence to take your time learning your new surroundings. You can get a job that you really enjoy, without the pressure of needing to find the first job available.
Some people find that a few months, to a year-long, sabbatical is what they need to recharge. If you have a well-funded emergency fund (and hopefully savings specifically for this break) you can take the time you need. Go on the trips you want. Spend time with those you seek to spend time with. And really make the most of your break to return refreshed and ready to conquer life.
Wrap Up
Building a fully-funded emergency fund can take some time, but it is so worth it!
The freedom and confidence an emergency fund gives you are like no other. You can take the time you need. Make the decisions you want. And really begin to live the life you desire.
So do the math. Figure out how much of an emergency fund you need to feel confident and then create a plan to put away those extra dollars.
Follow Your Path to Wealth. Increase your Income. Find a Side Hustle.
Do the work necessary to build up your freedom. Then enjoy the confidence it gives you.
How long did it take you to build your own Emergency Fund? What is something you never could have done if you didn’t have an Emergency Fund? Leave a comment below and join the conversation.
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Very good write-up. I absolutely love this site.
Keep it up!