Dear Never Know When There Will Be An Emergency, While you may not have had an emergency yet, you can bet on the fact that you will have one at some point. You just don’t know when it will happen. So, how do you prepare for various financial problem that you can’t predict? You need an emergency fund plan.
What Is an Emergency Fund?
An emergency fund is a savings account to help you get through unpredictable financial events. Examples of emergencies include events such as a flood, a fire, pet care illness expenses (which I recently experienced), car repair expenses, losing your job, or losing one source of your household income. (Note: Wanting tickets to a Taylor Swift or Beyonce concert does not constitute an emergency.)
An emergency fund is designed to act as a financial safety net to help protect you from financial failure in the event of an unexpected financial event .
Now, some of you may be thinking that insurance is for covering emergencies. Well, you are correct. So, guess what! An emergency fund is a type of insurance to protect you against a financial crisis and will cover things that are not cover by other types of insurance.
What is an Emergency Fund Plan?
An emergency fund plan is a plan for growing your fund in steps. Each step allows you to survive a larger unexpected financial expense, each step moving you closer to being able to survive an even larger financial emergency, thereby avoiding a financial crisis.
How Much Should You Have in an Emergency Fund?
I think that some emergency fund plans start too high, thereby discouraging people from even starting. I also think that some plans don’t go high enough, stopping at 3 to 6 months.
After going through the world-wide pandemic, I think that we can agree that unexpected events can last a lot longer than 6 months.
Furthermore, once you move into retirement, when most people lose their largest source of income, it is a good idea to have an even larger emergency fund, because most people no longer have the active income to rebuild the emergency funds that get used.
With this in mind, let’s check out my…
9 Levels of Emergency Funds
The Starter Emergency Fund Levels
There are 5 levels to the starter emergency fund.
Level 1: $300 – This is the first step in a starter emergency fund.
You may be able to pay at least 1 utility bill with this amount. If you have at least this much in your emergency, congratulations! It is said that nearly one quarter of all Americans have no emergency funds at all!
Level 2: $500 – This is the second step in your starter emergency fund. Keep stepping it up!
Level 3: $1000 – This is the third level of your starter emergency fund.
If you have made it to this level, give yourself a high five! According to a report done by Lending Tree, almost half of Americans do not have enough cash to cover a $1000 emergency. Instead, they would have to borrow the money. Perhaps they could borrow from a friend or family member. But, most people would have to finance the emergency, with either a credit card or a loan.
Level 4: 1 Month of Living Expenses – You have almost reached the final level of a starter emergency fund.
Level 5: 2 Months of Living Expenses – Keep your pedal to the metal. You have almost reached a robust level of an emergency fund.
The Robust Emergency Fund Levels
Level 6: 3 Months of Living Expenses – If you save up this amount, give yourself a pat on the back!
This is where you have moved out of the starter levels of emergency funds. Reportedly, nearly one third of all Americans have less than this amount saved.
Level 7: 6 Months of Living Expenses – If you save up this amount, give yourself a big hug!
If you are in a single income household, you should aim for an emergency fund to cover 6 to 9 months of your expenses.
Level 8: 1 Year of Living Expenses – Fantastic!
This is a good amount to have to save you in case you lose your job, or if we find ourselves in a situation like the pandemic again.
If you have reached this level…
Congratulations! (Imagine balloons and confetti falling from the ceiling!)
Once, you have this amount, you can take a break from this goal to focus more on other financial goals.
But, don’t take too long of a break, because ultimately, you want to build to your level 9.
Level 9: 2-3 Years of Your Living Expenses.
This amount is appropriate for retirement. If you are far from retirement, don’t forget that small but steady contributions are needed to get to this point in retirement.
It May Seem Hard
It may seem hard to save these amounts. But, just start where you are, and keep adding to your emergency fund every time you get paid. You can’t leave preparation up to chance.
Without a contingency fund, one accident or other urgent situation can result in a full blown crisis.
So, be intentional and build your emergency fund.
You can do it!
Always Wishing You The Best!
Rich Mom
Want to read more about emergency funds? Check out:
Invest or Emergency Fund First?
Do You Have An Emergency Fund?
If you are interested in reading about the Lending Tree report mentioned above, you can find it at the following link:
https://www.lendingtree.com/debt-consolidation/emergency-savings-survey