Once you have paid off your credit card debt, the next most important thing to do on your journey to financial freedom is to build an emergency fund.
An emergency fund is money set aside, preferably in a savings account, that is used only for emergencies. No, you can’t use this to build out your patio deck. No, you can’t use it to take your family on vacation.
It is strictly for emergencies. It’s for when your car breaks down and you need to fix it. Or when your boiler stops working and your kids yell and scream about being forced to shower in cold water. It’s for when you lose your job and you need to keep paying the bills while you are looking for a new position.
What counts as an emergency fund? The answer is cold, hard cash in a savings account. Not credit cards, a home equity line of credit, or your rich uncle.
You need an emergency fund because unexpected expenses and economic downturns do happen. They are a part of life. If you realize this, then you’ll prefer to be ready when they come as opposed to “going with the flow” and then getting slammed into a brick wall.
This is not just good financial sense, it may even prolong your life. Economic stress has physical ramifications.1 And as ConCappers, our goal is to limit our exposure to risks. There is no way you can attain financial freedom if you are constantly exposed to those minor and routine economic shocks.
How much do I need in my emergency fund?
The first thing you need to do, is to figure out how much is one month of reserve. A reserve is the amount of cash you need to cover one months’ expense. So here are the amount of reserves you need:
If you are just starting your career, then you the minimum is 3 months of reserves, but the preference is 6 months. Ideally, you’ll want 12 months or a full year and many of our clients do even more than that.
Ready to build your emergency fund? Click here to learn more.
If you are not a ConCapper, don’t hesitate to reach out to us to see how we could help in your financial independence journey. Visit our Requirements page to get connected.
Sources:
1 – Byrne, Christine and Holland, Kelley. (2022, May 12). How Does Financial Stress Affect Your Health? Everyday Health. Retrieved on September 22, 2022 from https://www.everydayhealth.com/wellness/united-states-of-stress/financial-stress-wellness-understanding-problem/
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