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Emergency Fund

Money Management

Why an Emergency Fund Needs to be More Than $1,000

Why an Emergency Fund Needs to be More Than $1,000

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I know this is going to ruffle some feathers out there. The reality is that $1,000 in an emergency fund just isn’t enough. Cost of living in most places in the US, is just so much higher than this amount.

Realistically, you don’t touch your emergency fund much. I know for myself, I don’t really ever touch mine because I have sinking funds for most of the unexpected expenses that pop up. My emergency fund is truly there for job loss or serious health issues.

In both of these situations, $1,000 wouldn’t even come close to cutting it. My minimums just for my student loans are $1,100!!! I couldn’t even afford my debt minimums in the event that I lost my job.

Of course, this is why I encourage multiple income streams, but that’s not the point of this post. My point is that $1,000 isn’t going to support you in the event that you lost your job.

Everyone’s situation is vastly different, which is one of the biggest reasons that I don’t agree with a one number fits all dollar amount. Just depending on where you live, that number could be vastly different. It is dangerous to tell people a single number to work from because that could push someone into financial ruin.

This is especially true if you have large non-mortgage debt, like I did and continue to pay off. You’re not in a situation where you’re going to pay off your debt in a year. Unless you hit the lottery or something!

Those of us with large debt especially need to have more than $1,000 saved for emergencies. I encourage 1 month of expenses at first.

Depending on your situation, you may want to consider adding to your emergency fund while paying off debt. If you own a home, have children, have an unpredictable job, or any other situation that requires money unexpectedly, add more to it.

I’ve been paying off my student loans for almost 4 years. I still have $67k left. When I lived at home, I had a small emergency fund of $1,000 with my sinking funds. My expenses were very small and almost all of the unexpected expenses would be covered by my sinking funds.

Now, I have moved out of my parent’s house and I have been increasing my emergency fund every month. I plan to continue adding to it until I have 3 months of expenses saved.

Even though that money could be going to debt, I would feel much more secure knowing I have money set aside for emergencies. The reality is that it isn’t a case of if an emergency happens, it’s when an emergency happens. By having more set aside, it allows you to more easily tackle your debt.

You may think it is counter productive to have an emergency fund of thousands of dollars set aside when you still have debt. I definitely felt that way for a bit of time. Mostly because I just wanted my student loans gone so badly.

But, once you have that emergency fund set, it allows you to easily make extra debt payments because you’re prepared for something that comes your way. The stress of what if, doesn’t stop you from putting your extra money to your debt.

If you’re trying to figure out how to build your emergency fund while paying off debt, my budgeting template helps you to do this. It has a section for income, expenses, and savings. Creating an emergency fund is so important and it absolutely deserves a line in any budget until it is full.

When you have an emergency fund set, you are free to put as much money as you want to debt. So, how much do you have in an emergency fund while you pay off debt?

 

Money Management

Building My Emergency Fund While Paying Off Debt

Why I'm Building My Emergency Fund While Being in Debt

Usually it is always said to pay off your debt before you build your emergency fund up. I would encourage you to have at least 1 month of expenses, if everything is very predictable in your life. What I mean by this is you don’t have any health issues, no kids, no house, fixed income every month, etc.

If you are someone with a variable income, kids, or a house, I would strongly recommend you having a larger emergency fund. At least have more sinking funds that can help you in the event of the unexpected. I would feel more comfortable with at least 3 months of expenses, in this situation.

Currently, I live with my parents, have no kids, no major health issues (I do have a sinking fund though), and have a fixed income I can rely on with additional income that varies. I only have 1 month of expenses saved up right now.

This has worked for me for the last 4 years while I paid off my debt. But things are about to change for me and I want to be prepared. I will also be changing my debt free plan shortly as well.

As always, personal finance is personal, so you need to do whatever works best for you.

1. I am moving out in June and my monthly expenses will be increasing.

Since I will no longer be living at home, my monthly expenses will be increasing and will be more unpredictable. This means that I will need a larger emergency fund. I’m not planning to stop my debt free journey for this, but I am adding to it now each month as the move approaches.

I have saved $950 for a moving out fund. This it to cover anything that might come up in the process of moving. If this is not used, then it will be immediately transferred to my emergency fund account. This will help me to hit my new emergency fund goals much faster.

Once I move out, I will continue to add to my emergency fund until it gets to my 3 months of expenses amount. I will not stop my debt free journey for this, but contribute some each month to help me get there. I do have cash available in a few sinking funds in the event that something happens that is larger than my emergency fund.

2. I will be done paying off my high interest debt shortly.

I started with $201k in student loans ranging from 3%-8.05% rates. This basically guarantees a long debt free journey on a teacher’s salary. When I first sat down and tracked it out, it was going to take me 8 years. This would bring me to about 31 years old. This didn’t take into consideration income increase or change in living situation.

I knew that I’d be able to do it quicker since I planned to increase my income with side hustles. And I wouldn’t be living with my parents until I was 31!

Once I am done paying off my high interest debt, anything over 5%, I will be shifting gears a bit. I plan to still pay off debt. But, I will also be building my emergency fund. Then, I will contribute more to my retirement accounts.

My plan is to split the difference of my leftover money each month. This means that any money I have leftover in my budget, half will go to debt and half will go to those goals.

I cannot wait for this to happen. I hope that it will happen at some point in the next year. With me starting a new job and moving out, things are a little unpredictable right now.

3. Time is on my side right now with compound interest.

The reason I am planning to change my financial plan once my high interest debt is gone is because I will still be in my twenties at that point. This is important because it gives me more time until retirement. For me, I consider time to be super important to consider when making your plan.

For me, I want to start investing more as soon as possible. The reason being that the longer my money can sit in my investment accounts, the more compound interest will work for me.

Compound interest, in simple terms, is when your interest earns interest. This is what will really build your wealth because it will make your money grow much faster without you even adding more money to it.

4. Since I will only have low interest debt, my investments will have higher returns.

I’m still going to be making debt payments, but I will be also focusing on my savings and then investing. A lot of people say it isn’t worth it when you still have debt because you are losing more money in interest then you’re making.

This is why I am waiting until my high interest debt is paid off. I will also wait until my private loans, which are 4.97%, are paid off. The reason being that my minimum payment each month is very high ($865.00). By getting rid of that monthly payment and my high interest debt, my money will be working much harder for me.

The high monthly payment I have with my private loans is a very large amount and I know once that is gone, I will be able to reach all of my other goals so much faster.

You have to do what works best for you!

You need to do what works best for you and your current life. Your finances should change as your life changes, and that’s exactly what I am doing. I am so excited to start this new part of my life because I will finally be seeing my money grow instead of putting it all to debt.

I encourage you all to look at your finances and make sure that you are financially set for emergencies, even if you are paying off debt. The point of paying off debt is to never go back into debt. If you are prepared for an emergency, you’re going to end up right back in debt. That’s why I don’t believe in having only $1,000, it’s not practical and potentially sets you up to not be prepared for an emergency. Do you save and invest while paying off debt?

Money Management

3 Things to Immediately Change Your Finances

3 Things to Immediately Change Your Finances

This post may contain affiliate links. Check out my Disclosure Policy for more information.

There are a few things in personal finance that I feel will actually change your life. A budget, sinking funds, and an emergency fund, and I’m not being dramatic when I say this.

If you utilize these three things, you’re financial world will be better because of it. If you’ve been using these 3 things for awhile, then you know what I’m talking about. When I learned about these three things and implemented them, it was amazing how stress free my financial life became.

The reason why these 3 things make your finances so much less stressful is because it prepares you for expected and unexpected spending.

You no longer will need to stress about money because you will have money earmarked for most things that come up.

Here’s a breakdown of what these 3 things allow you to do with your finances.

1. A budget to change your finances.

A budget is going to help you manage your cash flow, the money coming in and out of your account. This also allows you to plan for expenses you know are coming in a specific month.

Personally, I use a zero based budget because it allows me to give a job to every single penny that comes into my account. By the end of the month, all income money has gone out to do something for me. This might be paying off debt, adding to my sinking funds, replenishing my emergency fund, or general monthly expenses.

There are tons of ways to budget, you need to find a system that works for you and start tracking the money you have coming in and going out. This won’t happen over night, but just by being more aware of what money you have coming in and out, you will see changes pretty quickly.

I encourage you to not put yourself on a strict budget, but to instead just track your expenses and see where your money is actually going. Once you see some of your trends, make a change in the place that makes you most annoyed.

For me, I was most annoyed at how much I was spending on convenient stops for food and drinks. It’s crazy how much it adds up. I challenged myself to not stop for convenience food anymore and this freed up a chunk of my cash flow every month.

Remember, you’re trying to create new habits when budgeting, don’t rush the process. Slowly take out expenses from your budget that you know you won’t miss. By creating new habits you will see long term results, rather than only quick wins.

I have created a Google sheet template for you to use in zero based budgeting that has all the math done for you and allows you to track your expenses, you can get it here.

2. Sinking funds to change your finances.

Sinking funds might just be my favorite part of budgeting, mostly because I love having the freedom of having cash earmarked for specific things that come up. Sinking funds are when you put aside a bit of money each month to save up for a specific purpose.

A classic example is Christmas, it comes every single year, so why not plan for it! In January, you give yourself a Christmas budget for presents of $600 (totally made up number). Then, you divide that number by however many months you have to save that. I’d want this to be fully funded by at least November, so I’d divide $600 by 11 and save $55 each month. Yes, I rounded up, I would rather have more money and an easy amount to take out each month!

The great part about this is if you don’t use the entire amount, you can roll it over to next years Christmas fund.

I personally use sinking funds for expenses that I don’t know about, but I know will come up. I currently always put aside money for my medical and car sinking funds. The reason I add to these two every single month is because I want to be prepared.

I’d hate to be in a position where I need to say no to anything health related for me because of finances. Same thing goes for my car. Some months, I don’t touch either account, other months I use them a ton!

Last month, I had a metal tool go into my tire that couldn’t be replaced. They told me it would be $120 for a new tire and I didn’t need to stress about it one bit because I had the cash sitting in my sinking fund.

This month I had to see an ENT, allergist and my orthodontist. All completely unexpected and totaling about $145 in copays. If it weren’t for my medical sinking fund, this would have had to come out of my debt pay off for the month. It’s not terrible, but it would slow down my progress.

3. An emergency fund to change your finances.

The last and possibly most important thing to do to change your finances is to have an emergency fund. This is for those times that you totally can’t plan for. Everyone has a different idea of an emergency, but because I have sinking funds, my idea of an emergency is more like job loss, or loss of one of my income streams.

Emergency funds are going to get you through those expenses that pop up completely unexpected, or in the event of income loss. There is a lot of talk on the Internet about what you should have saved for your emergency fund.

It ultimately comes down to what you are comfortable with. I suggest, at the very least to have one month of expenses saved up, and really this should only be if you have a very secure job, consistent pay, no kids, no house. Any other scenario, I would suggest 3-12 months of expenses saved up.

This allows you to weather most storms that come your way unexpectedly. When you don’t have enough in savings, it is setting you up for financial ruin in the event of something happening.

These 3 things will set you up for success.

By having these 3 things in place, you are setting yourself up for long term success. It might not look pretty in the beginning and you might feel overwhelmed, but give yourself time. This isn’t going to happen overnight, but you will see changes happening once you get started.

I encourage you to just start, start tracking your expenses and getting a budget set up. See where your money is going and start telling your money what to do instead. I know this can be difficult at first, it’s why I offer email coaching to help you get started and hold you accountable to getting things done. Send me an email, if you want to be added to my email coaching waitlist. Have you set yourself up for success by having these three things done?

Saving Money

Why You Need an Emergency Fund

Why You Need an Emergency Fund

Emergency funds are the key to financial success and really the only way you have a chance of changing your ways. Most people currently don’t have an emergency fund and utilize credit cards when Murphy shows up at your door. But, there are other ways to deal with the unexpected and you don’t need to fall back on credit cards for it.

I strongly believe that everyone needs an emergency fund and a budget. Without these two things, your finances are going to be a disaster. That might seem dramatic, but I find so much truth in it.

Without a budget, you have no idea where your money is going. You aren’t working on any kind of short or long term financial goals and you’re ultimately not in control of your finances.

Without an emergency fund, you have nothing to fall back on in the event of job loss, car troubles, house repairs, etc. No matter how well you’re doing with paying off debt, in the event of an emergency, you will be stuck falling back on some sort of debt to get yourself out of the unexpected.

By utilizing the two, you are setting yourself up for success in your finances. The only way to change your current situation is to start budgeting and to have a solid emergency fund set up.

Why would an emergency fund change my financial life?

Most people who are getting their finances together don’t have an emergency fund and rely on debt to get through life. Whenever they have an emergency they put the expense on a credit card and treat the card as an emergency fund. The problem with this is that you are losing so much money on interest, it mathematically doesn’t make sense.

By having an emergency fund, you will have the money available to use in the event of the unexpected happening and won’t need to use debt. This ultimately saves you money because you won’t be wasting money on any interest and you won’t need to deal with the burden of added debt.

How much should you have in an emergency fund?

This is ultimately a personal preference, but there are some guidelines to determine how much you should have. I strongly believe everyone should have at least 1 month of expenses saved up. What I recommend is to have one month saved up, and then slowly build the rest while working on other goals.

For example, if you have debt you want to pay off, save one month of expenses, then start focusing on paying off debt while still sending a little to your emergency fund each month to build it up more.

Some things that would require you to have a larger emergency fund would be owning a home, having children, an inconsistent or unreliable source of income, or health issues. Any of these would require a larger emergency fund to be prepared for the unexpected that could happen. I would recommend 3 to 6 months of expenses saved up and even up to 12 months depending on your situation.

How to create an emergency fund?

This is why budgeting is so important. Once you create your budget, you will know exactly where your money is going. You can cut expenses that you don’t value to create more cash flow to work with. In your budget, you will create a line for emergency fund as an expense. If you’re working with a zero based budget, which I recommend, you’ll put all of your extra money at the end of your budget to your emergency fund to zero it out. This will continue until it is funded to the number you determine is needed. If you need help with creating a budget, I have a template you can use for this!

The first two steps you need to complete is creating a budget and an emergency fund to put you on a good financial path. If you have any questions or need help with this, send me an email, or subscribe to my newsletterDo you have an emergency fund?