Ready to learn How To Save An Emergency Fund?
After all, everybody should have one.
An emergency fund provides the financial freedom to make smart investments and safely build wealth.
If you’re new to building an emergency fund, you probably have a lot of questions…
- How Much Do You Need For An Emergency Fund?
- Where To Invest Emergency Funds?
- Why Do I Need An Emergency Fund?
Don’t worry, here at Fire The Boss™ we’ll answer these questions (and many more).
Already have an emergency fund? Now discover how to do a money makeover.
How To Save An Emergency Fund
What Is An Emergency Fund?
Emergency funds are your ultimate safety net.
They’re essentially a rainy day fund, shielding you from unplanned expenses.
Your emergency fund should be an entirely separate entity from your investments. This protects your hard-earned investments from harm.
Imagine having to plunder your index fund or cryptocurrency every time a hidden expense crops up. This would leave you extremely vulnerable and could mean withdrawing investments during market dips. This could be devastating!
What emergency fund are not for:
- Nonessential spending such as vacations, gifts, designer clothing
- Babies (unless completely unexpected)
- Upsizing your house.
All of these things should ideally be planned for and saved for.
As per their name, don’t touch your emergency fund unless it’s an emergency.
Do I Need An Emergency Fund?
Yes.
Why Do I Need An Emergency Fund?
Ok, perhaps the above answer was a bit brief. Sorry!
However we’re firm believers that everyone should build an emergency fund.
Let’s consider a scenario.
You’re walking back to your car after a long days work, at the end of an even longer month. You’ve managed to make the rent, car and insurance payments but are in urgent need of the next pay check. As you get back to your car you spot something on your window… a $100 parking ticket!
Luckily because you’re a Fire The Boss™ reader, you have an index fund! However due to a new type of coronavirus, the market has dipped. Your $200 investment is now worth $100.
Leaving it invested offers a strong chance of recouping your unrealised losses. You will probably even be in profit again over time! However you’re forced to withdraw the $100 – therefore the parking fine cost $200 ($100 realised investment loss + $100 fine) plus any potential gains your investment would have made.
This makes a bad situation even worse. Nonetheless, an even worse situation would arise if you had no index fund to fall back on. The parking fine could send you into debt or the dangerous world of pay day loans.
Take the same scenario but… you knew how to save an emergency fund. The $100 is still a bummer, but you simply withdraw it from your emergency fund and go about the rest of your day! Time saved. Money Saved.
4 Reasons You Need An Emergency Fund
- Job losses – Being fired from your job! Whilst we advocate building multiple streams of income, many still have just one (their job). Could you support your lifestyle without this? An emergency fund gives you breathing room, whilst finding a new job.
- Car breakdowns (or accidents). Repairs are expensive!
- Home repairs – broken heating, a leaky roof or broken windows etc.
- Medical bills – ill health is rarely planned for. Medical bills can be devastating – as we all learned from Walter White (yep, breaking bad reference).
- Vet Bills – we all know how expensive these can be.
How Much Do You Need For An Emergency Fund?
When it comes to emergency savings – how much is enough?
Well, the amount you require in your emergency fund is unique to you.
The generally accepted wisdom is to save enough to cover three to six months of expenses. This obviously requires calculating your monthly expenses.
An easier way to approach this is to simply save three to six months worth of your income. This would likely leave you with more per month than you need (e.g. if some of your income is normally saved or invested). However, better safe than sorry!
How To Save An Emergency Fund
You might be thinking… it’s all well and good telling us that we need an emergency fund. Tell us how to save an emergency fund!
I completely understand.
Money is tight.
Inflation is through the roof.
It’s never just as simple as “save more money”.
However, with the right method, the right changes and the right motivation… you can do it. Essentially, you need a money makeover. But here’s some specific tips on how to save an emergency fund.
1. Determine Your Emergency Fund Size, Then Break It Down
Set your goals!
As discussed, you need to determine your target emergency fund size. Work it out, write it down and go after your target!
Remember though, this is a long-term plan. Saving money takes a lot of time and consistency. Consider breaking this into achievable chunks. $15,000 may feel like an insurmountable task… celebrating at $1000 or $5000 milestones can make the journey much more enjoyable!
2. Consider Opening A New Emergency Savings Account
Remember, your emergency fund savings should be entirely isolated from other funds.
This not only makes it easier to track your progress, it builds a psychological barrier around the money. Pretty soon it will become a habit to never touch the emergency fund.
You don’t really even need a bank card for your emergency fund. In an emergency you can transfer money in your regular account. This provides another protective layer around the account and additional time to think twice before making that withdrawal.
Choosing a secure account from a reparable company is important. More on where to invest emergency funds later.
3. Automate Your Emergency Savings!
Once you’ve figured out how to save an emergency fund – make it passive.
Set up an affordable monthly deposit. Then… forget about it.
Automation is more reliable than manual work. You are much more likely to achieve your goals once you minimise the required time investment.
Even a $10 weekly recurring saving adds up to $500+ per year. This requires no work or attention once you’ve set it up. You’ll have an emergency fund saved up in no time!
4. Save Your Windfalls
Unexpected bonus? Gift? Tax return?
Add them to the emergency fund! You won’t miss the money – it was a bonus anyway. These sorts of boosts will hugely expedite your emergency fund savings.
Remember, as soon as you hit your target emergency fund size, future windfalls are yours to spend (or invest). Except this time you can do so guilt free, knowing you have a solid financial foundation!
5. Earn More, Spend Less, Save The Difference
Saving money is hard.
It’s a little easier when there’s more of it!
Think of additional ways you can make money. This could be as simple as working an extra shift. This isn’t so bad when you know the extra cash is another step towards your goal. Also consider starting new side-hustles or flipping unused items on ebay/amazon.
Think through some simple ways you can reduce your spending. Saving just $3/day will yield over $1000 within a year.
- Eat takeout and restaurant food less often. You can still see your friends! Just cook at home.
- Buy all your groceries in one carefully planned shop. Buying daily ingredients for single meals quickly adds up. Shopping lists help.
- Review your bank statements… are there any unnecessary regular outgoings? Are you really using your cable and gym subscriptions? Be brutal. Cut anything that does not give you value.
- Consider cycling or using public transport.
- Bring your own lunch, rather than buying it daily at work.
6. Review Your Budget, Review Your Saving Potential
If step 5 goes to plan… you may have significantly more money on your hands.
Don’t fall into the “lifestyle creep” trap.
Making more money, does not mean you need to buy more stuff. You don’t necessarily need a bigger home either…
Regularly review your priorities. If your priorities are to earn, save and invest enough money to achieve financial independence, stay the course. Ultimately, this will grant you freedom over your time and more time with family and friends.
7. So You've Built An Emergency Fund? Now To Invest!
Once you’ve hit your emergency fund targets, it’s time to invest!
Nope, not your emergency fund. You can now divert your monthly emergency fund savings into worthy investments. Now we’re talking!
Choose your poison: Cryptocurrency, Index Funds, Real Estate, Stocks…
But before you do that, let’s talk about Where To Invest Emergency Funds.
Where To Invest Emergency Fund
It’s important to consider where you should keep your emergency fund.
Emergency savings, by their nature, need to be readily accessible.
Illiquid investments (such as real estate) are clearly therefore not optimal.
Ideally your emergency fund savings will also earn you some interest. However security and accessibility is much more important than returns. Remember that the emergency funds is there to safeguard your other investments – not turn a profit.
4 Places To Keep Your Emergency Savings
- High Yield Savings Accounts – Whilst the interest earned will still be below inflation, it should be much better than a standard savings account. This is by far the easiest and most popular option.
- Certificates Of Deposit (CDs) – These require investing for an agreed time-span, for a guaranteed return. This could be for one month or several years, which clearly has limitations. You can withdraw early, but will often pay a fee.
- A Traditional Bank Account – As accessible as possible! The downside is the temptation to access the fund. Don’t use your regular checking account and ideally use a different bank. You will also earn minimal interest and inflation will chip away at your funds.
- Money Market Accounts – A cross between a checking and saving account. Similar interest rates to high yield savings accounts, but often more accessible (debit cards and cheques). However, they usually come with a minimum invest amount.
Where NOT To Keep Your Emergency Fund
Remember, this is how to save an emergency fund.
You do not want to risk losing your well-earned fund.
Whilst the potential returns may be tempting, it is therefore not generally advisable to invest your emergency savings in stocks/cryptocurrency. The volatility of these markets could destroy the reliability of your fund.
Why You Should Never Invest Without an Emergency Fund
Savings accounts take a beating in financial and investment circles.
If you have a little cash nest egg, be careful about letting that slip to an “investment guru.”
Said guru will emphatically tell you that holding on to cash is a bonehead mistake of epic proportions.
Because of inflation, that cash is losing value every year! It’s literally the only thing you can do to ensure that you get poorer over time. Instead of hoarding all that cash, you should invest it… and buy his course while you’re at it!
This is a dangerous message.
Because of this message, rookie investors sink every dime of their cash into illiquid investments (illiquid meaning that they can’t sell them quickly to raise cash, as with stocks or mutual funds).
This is the #1 reason new investors get wiped out – they don’t have the cash to absorb an unexpected turn of events.
Are There Exceptions To The Rule?
What if the investment pans out perfectly and the rookie investor makes a handsome profit?
Chances are, this investor is at even greater risk of getting wiped out, because of overconfidence.
They will double down with all their cash in an even bigger investment with more risk. Why not, when everything they touch turns to gold.
But eventually, their luck runs out, life happens, and they finds themselves in a desperate position with no cash to bail them out.
The truth is, smart investors have emergency funds. Major hedge funds and institutional investors maintain emergency funds.
And those funds are full of boring, disastrous old cash. Remember, the asset that “guru” told said you were an idiot to hold onto?
We’ll say it again, never invest without an emergency fund.
Savings Vs Emergency Fund
Similar principle, different intention.
Savings is generally the term given to amassing money or cash. This is without the intention of “investing” the money in a profit generating asset.
Emergency funds involve the exact same process, however the intention of the fund is solely to be stashed away for a rainy day.
If you do need to save money for a specific item or event – that’s sensible.
However, do so in separate accounts. Never blur the lines between the emergency fund and your savings accounts.
Is Saving Money Worth It?
Those gurus are right about one thing – cash has become less and less valuable over time due to inflation.
If hoarding cash is the cornerstone of your investment strategy, you are almost guaranteed to become less wealthy over time.
The more cash you hold onto, the slower your portfolio will grow, period.
If your quest for wealth is like dragging a bag of bricks up a hill, the bricks in that bag represent your cash. The more cash you have, the more bricks are in the bag; the longer and harder you will work to get to the top.
So why is cash such an important part of smart investors’ strategies? Why do they hold onto some cash when they know for a fact that it will slow down their returns?
Two reasons:
- To protect their investments.
- To protect themselves.
Saving Money To Protect Your Investment
If you invest in real estate or buy businesses (franchises, eCom stores, retail outlets, etc.), it might be tempting to buy the biggest asset your bank account will allow.
But in real estate and in business, as in life, you have to expect the unexpected.
If you have no emergency fund, you could get caught flat-footed in the face of a business disaster.
Real Estate Example
In the case of real estate investors, your property could need a major and unexpected repair – a new roof, a new plumbing system, all new HVACs, a new electrical system, etc. The local government could even demand these repairs or threaten to revoke your occupancy permit. You could wind up with a deadbeat tenant who doesn’t pay rent for months. You could get sued.
All of these developments can be extremely costly.
You may find yourself unable to afford the mortgage and in danger of foreclosure. Foreclosure is a catastrophe for real estate investors because it represents a total loss – you don’t get back a dime that you put into the property. Down payment, repairs, loan principal paydown … all down the toilet.
Business Example
If you own a business, like a franchise or eCom business, a manufacturing or supplier SNAFU could leave you without inventory or paying through the nose to keep the doors open.
An employee could leave unexpectedly or, worse, steal from you. You could become the victim of cybercrime. A faulty product could lead to a recall. You could get sued. Again, all of these incidents can cost a fortune and threaten the business with bankruptcy – again, total loss.
Maintaining an emergency fund gives you a cushion to absorb one or more of these unexpected developments without putting the asset at risk of total loss. Better to deplete your emergency fund than to lose everything.
Saving Money To Protect Yourself (From Bankruptcy)
Your emergency fund is not just there to protect your investment – it is there to protect you.
If all your cash is tied up in illiquid investments, you don’t have the cash to absorb an unexpected event.
Your investments could be performing swimmingly; the catastrophe could come not from the investment itself, but from life in general.
You or a loved one could wind up injured or ill with massive medical bills. The car might break down, or the home you own might face an unexpected and massive repair bill (same as with a real estate investment). You could face a messy divorce or lose your job. You could get sued. (Notice a recurring theme here?)
You may be rich on paper, but if your assets cannot be liquidated quickly to cover surprise expenses, you could find yourself in hot water. Having an emergency fund full of cash could save you from personal bankruptcy in any one of these situations.
Conclusion: How To Save An Emergency Fund
The most important thing about cash is that it gives you options.
It can be anything you want it to be – including a life raft out of a tough situation.
Investing is about balancing risk and reward.
Ideally, you accept as little risk as possible for as much reward as possible. Pros consider an asset a “good investment” if the potential reward far exceeds the risk.
An emergency fund is all about risk management. Yes, it decreases the potential reward, but it also drastically reduces the overall risk profile of the portfolio as a whole.
In short, never invest without an emergency fund as backup. If you have an emergency fund, you can invest with confidence and perhaps take greater risks on the path to even greater rewards.
Build your emergency fund and work towards financial freedom.
