Juggling bills, making career moves, saving for your retirement and other goals and just generally being an adult can seem like enough but while you’re doing that, there’s often something gets overshadowed in the chaos — having an emergency fund. Having that emergency fund, rainy day savings or “cushion” is essential for all of us.
Life is Full of Surprises
Life has got a knack for throwing curveballs. From surprise medical bills, the unpredictability of jobs, to the world being shut down by a global pandemic, there are just things that we can’t easily predict. The best defense against this kind of unpredictability is having a good savings plan. That metaphorical stash of cash can make the tough times not so tough. You’re probably already on board with making a good savings plan (of course, why wouldn’t you be) but just in case you’re wondering, there’s some questions we have the answers to like how much do you need, where should you put that money and what should you use that money for?
The 3–6 Months Rule: Not Just a Random Number
The usual recommendation for an emergency fund is three to six months of your take home pay. This might seem overwhelming if you’re starting from scratch but with the right plan in place you can work up to meeting your goal.
The first part of your plan needs to be deciding on how much you need to save, obviously more is better, but you can always work up to the right number for your situation. If you’re self-employed you probably want to save up the higher end of the spectrum, and maybe even beyond the six-month amount so you can ride out any slumps in your paycheques. However, if you’re sharing expenses with a partner and your mortgage is paid off with no children to take care of you could most likely get away with having three months in your account.
If you’ve figured out how much you need, you can now work that number into your monthly budget. If you add that line item in, and very importantly, set up an automatic contribution to achieve your goal, you’ll be on your way to this often-overlooked type of self-care and be able to weather the storm of losing your job or making emergency repairs to your house.
So now that you have a plan and you know how much you can put away every month, where do you put that money? Our answer is to keep it in cash. That doesn’t mean actual physical cash, but a cash account at your bank or somewhere like LifeGoals with a primarily cash portfolio. It’s best if you can find an account that will pay you interest with low fees so you’re not actually losing money in your account. Remember if you’re only getting 1% interest but paying 2.5% in fees, you’re eventually going to lose out (check out our rainy-day portfolio). Remember to keep your money easily accessible so you can access it when your emergency arises.
Emergency Fund vs. Other Cool Money Goals
While an emergency fund won’t seem as productive or glamorous as saving for your next vacation, there’s an order to how we recommend you save and spend your money. First, it’s important to pay off your high interest debt, this is usually credit card debt, but it could be any debt over about 10%. This kind of debt can compound easily if you’re not making more than the minimum payment so get that out of the way so you can move onto the next step. If you have no high-interest debt, start your savings and investing plans (check out the difference here). To help with your budget, our 50/30/20 plan can give you a good start on the framework.
You’ve got your high-interest debt paid down, you have a monthly budget in place, and you can start saving for your goals. Your emergency fund usually comes first, then your retirement, then the fancier goals like saving for a down payment on a house, your next vacation, or a new car.
Creating an emergency fund isn’t about being a financial guru or having stacks of cash; it’s about setting up a safety net for your future self. It takes a bit of time and some self-discipline, but the peace of mind it brings is totally worth it. In a world where tomorrow is often a question mark, having a financial cushion is like giving yourself a big high-five for being smart and savvy about your money.