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Surprise, Surprise!
Surprises are one aspect to life that you can always count on. And not only the good surprises like job promotions and babies and finally beating that one really good friend at Mario Kart. I’m talking about the not-so-welcome surprises like unexpected medical bills and going out to your car in the morning to find that it doesn’t start.
My family has been hit with both of those not-so-fun surprises within the last month. Shelling out over $600 up front for my son’s fractured leg expenses (that we’ll thankfully be reimbursed for in a month or so by our health share) and walking out to a dead battery in my SUV just this morning have been some of what we’ve dealt with.
A few years ago these things would have broken us. We would have had to put these expenses on a credit card and pay them off – plus interest! – as we could because we did not have an emergency fund.
Even though it is still excruciatingly painful to spend these hard-saved dollars, it’s a whole lot better than adding monthly payments to our life and paying interest!
How Much Cash Should Be In An Emergency Fund?
While different people have different opinions about how much you should put in your emergency fund and when and even how you should do it, these guidelines should serve as a place to start. Once you get started you can then figure out what works best for you and what motivates you.
Ideally, you will want up to six months worth of income on hand in the case of major income loss that will cover the time it would take to regain that income.
But if you’ve got less than $500 in your emergency fund right now and also still have consumer debt like student loans or credit cards, it is likely a better idea to get your fund up to $1000 and then diligently work on paying off your consumer debt so that you can work on fully funding your emergency savings.
So where do you start? How do you successfully fund an emergency savings account while still enjoying life and paying the rest of your bills?
Step One – Isolate Your Emergency Fund Account
This means to open up an online savings account that is solely for emergency fund purposes and totally separate from your every day bank account.
Why?
If you’re anything like me, you’ll find that having your emergency fund in your every day account to be far too accessible and tempting to use whenever the urge hits. Ain’t nobody got time for that when you’re trying to make forward progress!
The bonus is that there are several online bank accounts that offer decent interest rates (almost always more than your traditional bank will).
Check out some of these high yield accounts:
Synchrony – currently offering 2.15% APR.
Ally – currently offering 2.10% APR.
Marcus: – currently offering 2.15%
A potential downside to these accounts is that it can take up to 3 business days to transfer funds to your every day account in order to use them. However, most of them have a debit card option that allows you to use it like you would your regular debit card (which might be too tempting to have lying around).
Step Two – Purge the Splurge
This step isn’t necessarily the most fun step. But it’s where progress happens and it does get more satisfying as time goes on!
Where can you trim your weekly spending?
Is it going out to eat? Picking up $6 coffee on the way to work each morning? Going within a 2 mile radius of Target thereby entering into its magnetic field where you have no choice but to enter its doors and buy socks and lip gloss?
Whatever it may be for you, here’s what I challenge you to do:
Whenever you feel like spending money for convenience purposes, don’t. Instead, open up your bank account and transfer whatever you would have spent at dinner or on coffee or at Target into your emergency fund.
At one point, our family was going out to eat up to 3 times per week. If we average that out to $40 each time, we were spending $120 per week or about $500 per month going out to eat. That is quite absurd if I do say so myself and would have funded our $1000 emergency fund within 2 months just by eating at home!
Now is it realistic to cut out everything fun in life? Probably not! But if you do this consistently you will be well on your way to a healthy emergency fund.
Step Three – Stay The Course
At this point, you will have saved up your $1000 emergency fund and are well on your way to a healthier financial future.
Celebrate this win… but then get back to it!
Remember, your goal is to have up to six months worth of income in that emergency fund, but if you’ve got consumer debt like most Americans, it’s a good idea to get that under wraps first.
Keep those splurges at bay and instead of throwing money at your emergency fund, throw it at your debt. This means that you’re making much more than your minimum debt payments and will pay it off much faster.
Here are a couple of debt payoff strategies to consider:
Snowball Method: Pick the debt with the least amount of payoff remaining and “snowball” it. That just means throw extra money at it each month until it is paid off. Then once that debt is paid off, take that amount that you were paying towards it and throw it at your next biggest debt.
Avalanche Method: Choose the debt with the highest interest rate (no matter the account balance) and throw all of your extra money at it. This one may make the most mathematical sense, but sometimes the account with the highest interest is the one with the biggest balance and can take much, much longer to pay off. That can lead to a lack of motivation since the debt may not be disappearing as quick as you’d like.
This can be the most difficult part because depending on the amount of debt you owe vs your actual income, it could potentially take years to rid yourself of it all.
But it will be so, so worth it in the end.