My last blog post told how I nearly had a stroke after preparing my 2018 taxes. I originally thought I owed nearly a thousand dollars to the government. This was obviously very unsettling since I don’t have a thousand dollars sitting around. I don’t work two jobs for the fun of it after all. Thankfully upon further review I discovered an error I’d made and although I’m not going to get the refund I did last year, I’m also not going to have to worry about selling a kidney or at the very least my plasma.
What if I really had owed that tax bill though? According to my mother, I drink entirely too much diet coke. I figure attempting to sell one of my kidneys probably wouldn’t have fetched as much as I hoped for since they’re apparently aspartame-laced. My fallback plan was to use a good portion of my emergency fund.
Who Needs an Emergency Fund
So who needs an emergency fund? Just about everyone. According to the Federal Reserve Board, 40% of Americans wouldn’t be able to cover an unexpected $400 expense without borrowing the money or selling something.
Some of you are probably thinking, Holly, I’m barely covering the bills or I’m trying to pay down debt. I can’t possibly find more money to set aside for an emergency fund. Well guess what? I’m in the same boat but I still put a little money in my emergency fund as often as I can because we’re the ones who need it the most. If you’re always running tight on funds then what are you going to do when you get that really high electric bill because it’s been 10 degrees for the last month and you’ve had to kick the heat up? What about the doctor bills/copays when your kid breaks his foot? Or better yet, when he totals his car and you have to come up with a deductible of $500 or $1,000?
What Is An Emergency? Or Better Yet, What Isn’t?
An emergency is something unexpected that happens that requires immediate action to correct/fix. A night on the town with your friends, Christmas presents, or that new IPhone is not an emergency. A vacation is not an emergency. New tires for your car really isn’t an emergency since this should be budgeted for as routine car maintenance but since this can easily be a safety issue I’d allow this purchase.
As I mentioned earlier, medical crises, car accidents, your water heater blows up, or a relative across the country dies and you need a plane ticket in two days…these are unexpected events most of the time. If I’ve learned anything over the years, it’s that Life can knock you on your butt in a hot minute.
How Do I Start an Emergency Fund When I’m Broke?
For a full week I thought I was going to have to come up with a thousand bucks in about two months time. Talk about stress. I have an emergency fund but it isn’t at the level I’m comfortable with since I dipped into it last year on some questionable “emergencies”. I didn’t want to drain my meager funds so I was going to take about half of the money I needed from there and then I was going to get creative. Here are some of the ways I was going to come up with the remainder of the money I needed. Now that I don’t have to send this money to the IRS I am going to divert some of this to boost my emergency fund back up:
Cash rewards on one of my credit cards
Reduce my variable budget expense categories: gasoline, groceries, restaurants, and entertainment See if you can cut 10-20% from each of these categories for a month or two and divert those funds to your emergency account
Balances available from some survey sites I use. Most of the sites I use pay out in cash but if they pay in gift cards then choose something you can use for everyday purchases and transfer the money you save from your budget in that area to your savings account
Side job/gig: If you already work a second job see if you can add another shift. If you don’t work a second job then see if you can temporarily add one. Babysit, walk dogs, deliver for Uber Eats, etc.
If you’re an hourly employee then see if you can get some overtime hours
If you’re expecting a bonus, tax refund, etc., then divert at least a portion of these funds to your emergency fund
Have a no-spend month. Obviously you have to pay your bills but cut everything down to bare bones. Make it a challenge with your family.
How Much Do I Need in my Emergency Fund
Experts disagree on this. Personal finance is just that…personal…so I think it varies from person to person. If you’re living paycheck to paycheck or never had an emergency fund, then me telling you that you should save up 6 months worth of expenses is going to freak you out. I would advise you to start small. Aim for $500 to start with. Dave Ramsey’s first baby step is to come up with $1,000 for your emergency fund. If you’re a single parent/one-income family you might be comfortable with a little bigger emergency fund. Same goes if your income fluctuates greatly, whether that’s because you’re an hourly employee or commission-based income. Start small to get the ball rolling and then keep adding until you find your comfort level.
Where Do I Keep My Emergency Fund?
You do not want to keep your emergency fund in with your checking account. I also don’t suggest keeping it in your regular savings account. Open a savings account (I suggest Capital One or another online savings account) that isn’t too easily accessible. I keep a little bit extra in my checking account but the majority of my emergency fund is in an online savings account. In case of an emergency I can transfer the funds to my personal checking account within 3 days.
I can’t stress enough the importance of an emergency fund, especially if you live on a tight budget. My experience has been that financial speed bumps always happen. You might not be able to forecast every little thing that will go wrong but you can plan for the inevitable. My emergency fund has saved my butt many times. Some parting advice is to start with your next paycheck, even if you’re saving $10 a paycheck. If you get paid twice a month then you’ll end up with $240 this year. Keep adding to it as you can. Make it a game to see how much you can save. Also, be sure you’re not dipping into it for non-emergencies or other people’s emergencies. You want it to be there for you when you need it.
Do you have an emergency fund? How much do you keep in it? Any other tips to create one on a tight budget?