The Importance of an Emergency Fund and Saving for a Rainy Day

"A penny saved is a penny earned." - Benjamin Franklin

The Six Month “Cushion”

Life is pretty complicated and seems to throw you curveballs when you’re not looking. With this being said, it is becoming ever more crucial that you set aside extra money in case of an emergency. If you lost your job tomorrow, do you know how you’ll pay the rent next month? Who is going to pay that medical bill from when you broke your arm? How about that new tire for your car when you accidentally ran over some nails left in the road near a construction site?  Could you pay for those unexpected expenses without going into debt? For more than half of Americans, the answer is no. I’m willing to bet that most would pay those unexpected bills with a credit card, their savings account, or even pull money from their 401(k) accounts prematurely.  All three of those actions can severely hurt your financial future.

Experts have always recommended that you have at least three to six months’ worth of expenses set aside in your emergency fund in case of a financial crisis. Whether you unexpectedly lose your job or drop your phone in the pool, you need to be prepared for life’s emergencies. Any type of financial predicament that would force you to pull from savings or retirement accounts could be a detriment to your savings schedule, not to mention causing a considerable tax liability.

Squirrel Away for a Rainy Day

Saving for a rainy day and sacrificing upfront cash for an unforeseen emergency fund might sound like an absurd concept at such a young age.  As Millennials, we are notorious for thinking that nothing bad will ever happen to us.  Take a lesson from every adult who’s ever had to pay for something unexpectedly and stash away some money.  You’ll undoubtedly have to discipline yourself heavily and possibly even swap a night at the bars for staying home and renting from Redbox, but at least you’ll be able to sleep soundly instead of staying up worried about how you’re going to make your next credit card payment on time. One day, you’ll thank yourself for not spending every last penny you earned, and you’ll feel confident knowing that any emergency that comes your way won’t throw you into heavy debt.  Save small amounts of money to start, be consistent with your contributions, gradually increase the amount over time, and keep money separate from your checking/debit card account (either in cash or a separate account) to keep from spending it.

Building Your Emergency Fund

So, how do you start an emergency fund? First, you need to start with a goal, let’s say $1,000. This amount will be enough to kick-start your fund and get you through any of life’s hiccups.  You may be wondering, how in the world do I start with $1,000? Well I recommend you start with reading the book, 30 Days to $1K! Let’s set that as your goal right now. Every paycheck, add a pre-determined percentage of your income to this separate account, just like you would do with your savings account.  Depending upon your unique situation, you’ll want to calculate how many months it will take to reach your goal. To put it in perspective, let’s say that your net pay (after taxes) is $2,500 a month, and you set aside 10% of that for your emergency fund to get you up to speed. In four short months you will have reached your first goal of accumulating $1,000! You’ll also want to consider simultaneously paying down your debt as you increase your emergency fund.  By doing so, you’ll free up more of your income down the line and be able to increase your savings.  As mentioned previously, aim to save at least three to six months’ worth of expenses for your safety net.  Review your budget to determine how much you should ultimately stockpile in your fund.