How to save $1000 for an emergency fund and why you NEED to asap!
In North America the average annual income for those in Midlife (40-55 yrs of age) is $50,000 - $60,000. Not too shabby, right?
Unfortunately, our average annual debt load is $60,000 -$70,000 per year. Which leaves a household deficit of $10,000 per year! Now imagine you are already $10,000 behind and you unexpectedly lose your job or succumb to an illness that adds a mounting medical bill…what happens?
Statistics show that nearly two-thirds of all bankruptcies are due to medical expenses. Here in Canada we have medical coverage as some insurance, but it does not cover medications or loss of your full income.
At an age with increased health risks we NEED to have an emergency fund!
What is an emergency fund?
An emergency fund is simply described as money that you have set aside for life’s unexpected, but guaranteed to happen, events. The most common ones being job loss, illness and major home or vehicle repairs.
Lets also clear up what is NOT classified as an emergency. This non-emergency group will have its own “sink fund”.
A sink fund is savings that you set aside for specific planned expenses. Examples of a sink fund could be: buying a new car, going on vacation, buying a home, changing jobs…these are not unexpected. Therefore, you can plan for each of them with a separate fund.
What will you gain by having an emergency fund?
To enjoy the benefit of living your life purpose & dreams, it is very important to be intentional with the foundations of living: health, relationships, wellness, career and last, but definitely not least…finances.
Not having a stable financial plan can easily crumble all of your dreams.
One of the best ways to stabilize your finances is by having an emergency fund. It is your “life” insurance policy, because life always happens. It is about being prepared for the unexpected and having a safety net to provide for your families basic needs. An emergency fund offers you security, peace of mind and most importantly OPTIONS.
When you are prepared you have the option to not stumble and fall further into financial despair or keep on moving forward while you make an alternate life plan.
If you lose your job with no emergency fund, you can miss your rent/mortgage payment potentially risking your families home or you can use your emergency fund to pay your rent until you get back up on your feet.
Saving up a $1000 emergency fund can be overwhelming at first glance to some, but in my opinion it is a much easier option than trying to save your home and families security with limited options.
If building your emergency fund up seems like it is out of your reach, take baby steps. Start by committing to save $20 a week. If you do that 50 times you will have $1000.
Or you can save $84 dollars a week for 12 weeks if you have more disposable income.
My point is that anyone can create a safety net. If you can save it all in one shot…great…now move on to step 2 by saving 3 months of expenses. There will be progress…as long as you keep taking steps towards your goal.
What qualifies as an emergency?
Before using any money from your emergency fund ask yourself these three questions first:
Is it urgent? Can the “emergency” wait the months it may take to save up instead of depleting your emergency fund? If yes, wait. If not, then that is why the money is there…to be used when needed.
Is it necessary? Your car dies…is it necessary to take out of your emergency fund for repairs or to buy a new vehicle? Can you survive without a car until you can save up for the replacement? If you unexpectedly lose your job, are you able to take a lower paying, easy to obtain, job to make ends meet until your career position is available? Or are you finding yourself without options for several months and in desperate need of your funds? If so, use the money.
Is it unexpected? Aging with increased medical bills is expected…an old car on its last life is expected to be replaced…children going to college with tuition fees are expected. Your roof blowing off is not expected…getting cancer is not expected…losing a spouse is not expected. If you didn’t see it coming…then it should have been saved for in an emergency fund.
TIP*** If you use your emergency fund for a non-emergency you can almost guarantee that an actual emergency will swiftly follow.
It is the Law of Inevitability. My personal story…I had my emergency fund set and was proudly filling it up from the $1000 fund to the 3 month of expenses fund. My family had been on the search for a new companion puppy for our dog for years, however we had not put money in a sink fund for it.
When a great deal on the perfect breed came our way we used our emergency fund to pay for the dog with the intention to quickly replace the funds. What happened? Well, the dog fit right in and was a great addition to our family.
Then the Law of Inevitability arrived and my husband lost his job and I lost one of my biggest clients…hmm. It ended up taking us just over 2 months to financially recover from the emergency and us not having a full fund because we bought the dog.
Build your sink fund for precisely these reasons.
If you need to use your emergency fund for any reason, be sure to swiftly make a plan to refill it. You don’t want to be left exposed to disaster.
How much should you put in your emergency fund?
There are three stages to your emergency fund. Start with step one and upgrade your goal as you reach each level.
Save $1000.
Save 3 months worth of household expenses. Calculate your monthly expenditures and multiply by three. Be sure to include all the necessities like rent, food, utilities at the very minimum.
Continue to save 6 months of expenses.
Where should you put your emergency fund?
Your emergency fund needs to be readily accessible for you to withdraw from in case of an emergency, so DON’T lock it in to any type of investment plan.
It is also important to keep it separate from your sink fund savings. The emergency fund is ONLY for emergencies and if mixed in with everything else it can accidently be withdrawn from leaving you short of your goal.
Best places to keep it are in a separate savings account, in a safety box/ somewhere safe at home, or even an online banking option like Wealth Simple.
How do you save your first $1000 for your emergency fund?
We have gone over all the details of why and where to save…but the biggest question most of us have is not whether we should do it…but how to save the first $1000.
Here is a list of steps to take to save, trim and earn some extra cash to put towards your savings goal:
Make a monthly budget and stick to it. Having control over your finances will result in reaching your financial goals a lot quicker. Know what is coming in, going out and making sure to stick to the allotted spending amounts. Save whatever is left over.
Have set withdraw savings goals. They could be weekly, monthly or even a percentage of all money coming in (i.e. 10% off the top). Be specific about the amounts as well as withdraw dates.
A quick way to save more money without earning more is to cut monthly expenses. Can you cut a few streaming subscriptions, shave a little of your grocery bill or call your insurance and cell phone providers to negotiate lower monthly bills? You may be surprised at how much you can actually cut without feeling any real “sacrifice”.
Start up a side hustle. Freelance, craft, Uber, babysit…whatever you chose add a side hustle on your free time to increase the speed of your savings. Work on your side job in the evenings, on the weekends or set-up some passive income sources that don’t require much of your time after the initial set-up.
Ask your employer if you can pick up a few extra hours or schedule a meeting to discuss a raise in your salary (even offer to take on more responsibility for increased pay rate).
Until you have your savings goals met request to take your vacation pay in leau of time off from your employment.
Transfer any gifts, income tax or unexpected money straight into your fund.
Setting up an emergency fund is one of the best financial choices you can make, especially in midlife.
I hope that this article helps you take the necessary steps to saving your first $1000.
Thanks for reading!