About the Emergency Fund
Welcome to the next lesson which is about creating an emergency fund! Congratulations for making it here and getting started with this. I'm really excited for you to jump start your finances.
Before creating your emergency fund we need to know what an emergency fund is and why we need it. An emergency fund is an account that you have money in dedicated solely for emergencies which are things like: a car breaking down, having to go to the hospital, or maybe taking an emergency flight to go see a family member in an emergency situation only (not for fun or leisure). These are some of the examples of why you would use money from your emergency fund. Your emergency fund is something that you don't ever touch outside of these rare situations.
An emergency account is step one for a reason and the reason is before going to the next steps of in this checklist (paying off debt, investing, preparing for retirement) you want to make sure that you have a foundation to fall back on if ever necessary.Your emergency fund money is literally sitting in account that you do not touch!
There is nothing complex about an emergency account. Everyone can easily understand it and we are going to keep it equally simple Step 1) Open the account Step 2) Fund the account. That’s it!
Open the Account
To create your emergency fund you want to open a savings account at a local branch to a bank in your city. You want to be able to walk into this bank and pull money out when needed. You do NOT want this account at the same bank as your main checking account. You don't want an ATM card. You don't connect this account to any of your other accounts. You don’t even need this bank to have an app to sign into from your phone. It’s ok if it has one because it’s hard to find one without this nowadays, but don’t download the app. If you do ever have a real emergency where you need to use your emergency account, the only proper way to do this is physically walk into the bank and make a withdrawal.
We set this account up to be hard to access because your emergency fund is something that you don't touch. Removing easy access removes temptations and sets the right mindset for this account.
The best place to have your emergency fund is a local credit union. Credit unions generally allow you to open a savings account without requiring you to open a checking account as well. Other benefits of using a credit union are: Credit unions offer great products for things like home mortgages. They usually share returns of profit with the members of the bank. Lastly, they usually don't have a lot of branches so you don't have the temptation from easy access by constantly driving by them. Here is a credit union local to me in Las Vegas. Search for a credit union in your area and apply for a savings account.
You may also choose to open this account at a local branch of a large bank, again, that you do NOT have other accounts at. Some popular banks are Chase and Wells Fargo.
Fund the Account
Don’t continue reading until you have opened your account. It should only take less than 10 minutes to open the account. Don’t stress about which bank, any of them will work, just make sure there are no fees associated with the savings account!
So now you’ve opened the account, let’s talk about the more important part which is funding this account. First, you need to know how much you should fund it. To keep it simple, the minimum amount to save is $1,000. Many experts suggest the max between 3 and 6 months of living expenses. Remember living expenses include your rent or mortgage, all utilities and other bills, all debt payments, food, transportation, things for your home personal items and maybe even a little bit of money for fun. Add all of these expenses and that’s how much it cost you to live for a month. You can calculate this or guesstimate, but you need a goal. If you don’t have much money to set aside because you are just starting your money journey it’s safe to set a goal of $1,000.
Now that you know how much you're going to save, let's go ahead and transfer it to the account we just opened. Hopefully you have your savings goal amount available in a checking account. If so, transfer this amount to your account and if you cannot transfer then you have one goal for tomorrow which is to withdraw your goal amount from your current bank and deposit it to your new emergency fund account. This should only take 10 minutes or less as well.
If you don’t have this amount, IT IS OKAY. Most will not have this money readily available today. Instead of transferring your full amount, you're going to transfer a small amount from your current checking account now to complete the initiation of the new savings account and next set up account in automatic transfers.
The automatic transfers from your current checking account to your new savings account will be set up for every single pay period starting on your next payday. Follow these instructions to set up these transfers. First, log in to your current checking account online. Next, go to transfers, choose an amount and choose the date. You will choose one of the following options to reach your total emergency fund goal.
2 transfers (at 50% of goal amount) - $500 for $1,000 goal
4 transfers (at 25% of goal amount) - $250 for $1,000 goal
8 transfers (at 12.5% of goal amount) - $125 for $1,000 goal
Do this for each of your next pay periods for the number of times you committed to on the specific date that you get paid on. Use a calendar to find the specific date and follow the instructions to schedule the transfer.
If your bank gives you the option to schedule payments based on a frequency (every two weeks or 1st and 15th), you may use this option. Choose the corresponding frequency and start date (which is your next pay day) and lastly an end date or the number of transfers. To choose an ending date you will need to use a calendar to see what day you will complete all transfers.
This last step should only take 30 minutes or less.