An emergency fund is science fiction

I still remember those words coming out of my mouth while we were talking with some friends on a random day…I thought for the longest time an emergency fund is cash that people have sitting around because they are so rich. Isn’t that crazy???

Even right after I started my money make over, I did not make sense of money “just sitting in a savings account”. When I started getting more information about financial independence, I learned, experts suggest starting with having an emergency fund of 3 to 6 months’ worth of expenses.

I was not quite convinced of this step. I wanted to hurry up and invest to make up all this time lost and pay debt. Oh, another tip was to focus on one thing. Well, I did not listen, I wanted to skip to the part where I can direct some funds to investing. Off course it was not much since our monthly obligations and debt were piling up…

I did not see the importance of that emergency fund up until there was a wave of lay off at work (and it was not my first rodeo, more on that in another post). Around 10% of people gone within a couple of hours. Off course all the lunch conversations turned into speculating what they were going to do, how they were going to cover the next rent check, utilities, etc. And also, conversations turned into what if I was the one being laid off?

Well, my situation was not different. All these reading and listening on personal finances and following all these experts… We were still living paycheck to paycheck. We may have improved our net worth because we started investing but we did not have any cushion. I repeat, we were still living paycheck to paycheck! I had to, first have a mindset shift and also see it with my own eyes why we all need to build and emergency fund before anything else, before investing and before making extra payments to finish with that ugly debt. Please do not wait to see it with your own eyes. There is not job guaranteed to last a lifetime. None.

Now, we understand and have very clear idea of how important is to have an emergency fund and are laser focused on building it as fast as possible.

Now let’s start with the basics because I know we hear those two words together and pretend “no need, I will be fine”. I know I did.

An emergency fund is money you have aside exactly for that: an emergency. No, those shoes on sale for only 24 hours, are not an emergency. This fund is money you have access to in case you miss a paycheck for whatever reason. Your income may have temporally halted but the power bill, rent, etc. are still on their way. 

This money needs to be in a different bank account from the one you use on a daily basis. 

This is how we worked it out: 

We have a separate bank account where we saved $1000 for unexpected things. For example, the other day my car’s battery ran out of power because I barely use it now (pandemic times). Guess what: I did not have to use credit to replace it! I had the pace of mind to pay for it without messing my budget or going into debt and it felt sssooooo GOOD!

On other hand, we calculated how much is it that we need to stay afloat on a monthly basis: mortgage payment, utilities bills, groceries, etc. the basics. Once we came up with that number, we put it as our goal and gave it priority on our budget, or what I like to call it, our good spending plan.

We are pretty close to have saved 3 months’ worth of these expenses and we will no stop there. We are all for peace of mind and knowing we have that money aside gives us lots of confidence. 

Your homework my friend, is to start by having in black and white how much is that you need to have saved for 1 month. Again, start with the basics. Take that big goal and break it in small chunks, hit those marks and celebrate. It will make you feel energize and motivated to get to the next one.