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It’s important to get paid every month. Paying bills and surviving are a lot easier that way. 

But what would happen if you didn’t get paid for a month? How would that impact your life?

I think the answer varies for every single person and family because no family’s financial situation is the same. It also depends on the time in your life it happens. If I had to go an entire month without getting paid six years ago, it would affect me a lot differently than today.

Nobody expects to go a month, or even months without getting paid, and most families would be in big trouble if they lost a job or had a lag in their paychecks.

According to an article in the Chicago Tribune earlier this year, most Americans don’t have enough money to pay for common emergencies like losing a job or medical expenses.

But since job security isn’t always guaranteed, it’s so important to prepare your finances just in case something happens.

I Got a New Job, a Sweet Raise, and No Paycheck for a Whole Month!

This summer I got a new job and will be teaching Social Studies at a new school in the fall. This is crazy exciting because it comes with a giant pay raise and I’ll be working shorter hours. More money and more time with my family is a major win.

However, there’s a gap between when my old contract ends and when my new contract starts. As a result, I didn’t get a paycheck for the entire month of August. The last check I received was on July 20, and I didn’t get paid again until September 7. 

It turns out, life doesn’t stop or slow down. As each day goes by, bills still need to get paid, our cars need gas, and we need to eat. The expenses kept rolling in and we needed to come up with a plan to pay for everything even with a much smaller income for the month.

Our emergency fund was our saving grace. Knowing that we had several thousand dollars waiting for a rainy day decreased our stress and anxiety for the month. We knew we had enough money to cover all of our expenses, no matter what happened.

But like I mentioned earlier, not everyone is prepared for losing a job or can survive not getting paid. It can create a real hardship on your family if you’re not prepared.

If your job stability looks uncertain, or you’re not prepared for basic financial emergencies like losing a job, an unexpected emergency room visit, or car repairs, I have a solution for you. You don’t have to live with the stress of the “what if?”.

In this post I’m going to teach you how to start an emergency fund, and how ours has bailed us out of a bunch of stressful situations. It’s been the single easiest way for my family to increase our peace of mind and eliminate financial related stress.  

If you don’t already have an emergency fund, learn how you can start one today and build a solid financial foundation for your family and always be prepared for the “what if”.

What is an Emergency Fund and Why Do I Need One?

I first learned about why it’s important to start an emergency fund by following Dave Ramsey. All of my beginner personal finance knowledge stemmed from his teachings.

The basic principle of an emergency fund is a stack of money set aside to help you pay for any financial emergencies that come your way.

With an emergency fund, you don’t have to take money out of your monthly budget, and the emergency won’t affect your ability to pay your bills. And most importantly, you’ll avoid going into debt if an emergency strikes.

I like to think of an emergency fund as the insurance of personal finance. You pay money every month for car insurance, life insurance, and health insurance and hope you never need to use it. But the times you need it, you feel so thankful that you make those monthly payments.

The same is true for start an emergency fund. You might need to make a few sacrifices or work hard up front to invest the money, but when your emergency fund is fully funded to a comfortable level, you can leave it alone until an emergency pops up.

You hope you never have to use your emergency fund, but the truth is you’ll need to use it eventually, and when you do, you’ll be glad you have it.

Emergencies could be car repairs, medical expenses, a broken thermostat, your oven starting on fire, or a roof repair. These are all things that have happened to us in the past year, and each time our emergency fund has been our saving grace. Not one of these emergencies affected our monthly budget or distracted us from our goals.

How Much Money Should I Keep in My Emergency Fund?

At a most basic level, $1,000 is a great place to start. It isn’t a ton, but covers most car repairs, replacing appliances, and smaller medical emergencies. If you use money from your emergency fund, make sure you replace it to prepare for the next emergency.

When I first started budgeting, I had zero savings to speak of. I might have had a couple hundred bucks, but it never amounted to much and it never grew.

Once I started learning more about personal finance, I knew I needed to actually save money for a rainy day. After a couple months of reading a lot of personal finance blogs, I created a budget and learned how to save money.

I really believe saving money and budgeting are learned skills, so your finances will get better if you spend time learning about personal finance.

Over time, my emergency fund slowly crept up to $1,000, which was my goal.

When my wife and I joined forces, and our finances merged together, so did our emergency funds. Now all of a sudden we had $2,000 hanging out waiting for a rainy day.

And just to be safe, we added another $2,000 from our wedding gifts on the off chance we got pregnant right away. Turns out babies are expensive, and we wanted to be prepared. With a $4,000 emergency fund as newlyweds, we felt pretty secure and stress free.

A later stage in Dave Ramsey’s Baby Steps is to grow your emergency fund so it will cover 3-6 months worth of expenses. This will cover more dramatic emergencies, or long lasting circumstances like losing a job. This amount varies based on your expenses and situation, but it’s nice to have it in case you need it.

So far this year we’ve withdrawn almost $1,000 out of ours and it’s been a life saver.

An Emergency Fund is a Financial Foundation that Can Save Anyone’s Finances

Unless you’re Professor Trelawney at Hogwarts, nobody can predict the future, and to be honest, even she wasn’t very good most of the time either. Emergencies, both big and small, are going to pop up in the course of your life. It’s better to be prepared than blindsided.

When you start an emergency fund, life becomes less stressful. Last winter our thermostat stopped working while we were out of town for a week during our Christmas holiday. We live in Minnesota, so we came back to a house that was 34 degrees. I still remember bringing all of our bags into the house thinking, “it feels pretty cold in here.”

We spent the next couple hours on the phone with a repair guy who walked us through the troubleshooting process. In the end we needed to buy a new thermostat and install it. So I was off to Home Depot at 8:30 at night to buy all the supplies and get to work.

When all was said and done, we spent over $200 to heat our house again. I swiped our credit card at the store and we took money out of our emergency fund to pay it off right away. Luckily none of our pipes burst or our emergency would have been a lot worse.

The best part about having an emergency fund in my opinion is that when unexpected expenses come up, it won’t have a severe impact on the rest of your budget. You won’t need to sacrifice other goals to pay for car repairs. Or if money is really tight, you won’t need to choose between paying your bills and buying food.

Practical Steps to Start an Emergency Fund Today, or as Soon as Possible

Set Up Your Budget

Your budget will tell you how much extra money you have at the end of the month. You can transfer anything extra to your emergency fund until you have your base $1,000.

Then if you want, you can keep building to 3-6 months of expenses. That’s the stage we’re at now. Our goal is $10,000 by the end of December.

Living on a budget has a magical way of uncovering your financial priorities and finding money you didn’t know you had. You’ll be amazed when you track every dollar.

If you don’t have a budget or know where to start, use my Annual Budget Spreadsheet. It will help you make the exact same budget that helped us pay off $73,000 of student loan debt in less than four years, and it’s completely customizable to your family situation.

Declutter Your House

What do you have in your house that has value, but you never use? If it’s collecting dust in your house, clean it up and see if you can sell it to someone who will actually use it. Last year we sold my snowboard, a few spring jackets, an old ipod, my electric guitar, and surprisingly enough, Minnesota Viking beanie baby bears. That gave us an extra $250-300 for zero effort. That will put you a quarter of the way to $1,000.

Cut Expenses and Save Money

Is there anything you’re buying that you can do without? Can you cut your cable and rely on Netflix and Hulu instead? If you can free up $100-200 a month by living a bit more frugally, your emergency fund will be good to go in just a couple months. A big cut that can save you a bunch of money is going out to eat. Instead, use that money to help start an emergency fund.

Pick Up a Second Job

Not the most glamorous option, but it brings in money immediately and consistently. It’s been over six years since I’ve only worked one job and my budget is much happier with the extra income. If you’re able to pay all of your bills on your primary job, any extra money earned from your second job can go straight to your emergency fund.

It’s probably the fastest way to $1,000 since increasing your income brings in more money than cutting expenses. Now if you can do both, you’re really cooking with gas.

Where Should I Keep My Emergency Fund Savings?

Short answer, NOT under your mattress or in a hole in the backyard.

There are a lot of options, but I’m going to narrow it down to two.

Open a Savings Account at Your Bank

The first and easiest place to keep your emergency fund is in a savings account at your current bank. Chances are you probably already have one.

If that’s the case, stock pile money in there until you start to feel comfortable with your emergency savings. Remember, your emergency fund is there to create peace of mind. Save up enough so it does that.

The sucky part about keeping your emergency fund in a traditional savings account is that interest rates stink!

And that’s an understatement.

Our Wells Fargo account gives us 0.01% interest. That’s a couple pennies a month.

In January 2020, we switched a big chunk of our emergency fund to an online savings account (with a much bigger interest rate).

Open a High Yield Online Savings Account

Online savings accounts are amazing.

I just opened one in January 2020, and as of July 31 I’ve earned $45.12 in interest.

Compare that to $0.38 at Wells Fargo, which has more money in it.

Online savings accounts are great because they offer much higher interest rates, most hovering around 0.8-1.0% during COVID. Ours was 1.5% pre-COVID.

It’s free money and there’s usually less fees and hassle. I wrote an article highlighting 4 reasons we switched to an online savings account. Read it to learn more.

We Made it Through August and Didn’t Even Use Our Emergency Fund

I feel like the planets aligned a bit for us in August. We fully expected to use our emergency fund to get us through the month, and mentally prepared to do so. However, two major things went our way and we made it through unscathed.

First, August was a three paycheck month. My wife got paid three times instead of two, which made up for 2/3 of my missed salary.

I’m sad I missed out on my own three paychecks. The extra cash would’ve hit our goal to buy a minivan. We would’ve had enough to buy minivan with straight cash, which was our goal. Now we have to wait another month or two.

The other helpful event was totally unexpected. I wrote a post earlier this year about our hospital bills for having our baby girl. It turns out we overpaid the hospital and they sent us a refund! I have no idea how that happened, but it was a wonderful surprise for our budget.

In the end, we didn’t use our emergency fund, which I’m thankful for. But on the other hand, it was so relieving knowing we had money set aside in case we needed it. My stress level would be much different without our emergency fund.

Question for You…

What emergencies have popped up in your life in the last year? What other tips do you have for building an emergency fund?

Our budget and goals changed our lives and it can change yours too.

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4 Practical Tips to Start an Emergency Fund and Save More Money

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