Episode #55: How Long It Took To Save My Emergency Fund
Today’s lesson is going to go back to one of my age old favorite topics because it’s SO important. And that is, of course, emergency funds.
If you’re not familiar with emergency funds, also known as FU funds, or freedom funds, an emergency fund is an account where you keep 3-6 months of necessary living expenses saved at all times. If you’re self employed or have low job security then you may want to keep more in your emergency fund. Your emergency fund is the bank account you can dip into if the proverbial brown stuff hits the rotating ceiling appendage, but otherwise it’s not to be spent on anything else! It’s not your regular savings or checking account, so don’t use it like one!
You should have this emergency fund saved in a separate bank account where you’re not tempted to touch it, and preferably have it in a high interest account so that it’s at least earning a little bit of money for you as time goes by.
Today’s episode specifically is going to be talking about how long it takes to save an emergency fund, because I know a lot of you out there are looking at your finances (or lack thereof) and feeling like an emergency fund is just a luxury item for wealthy people because it’s going to take you SO LONG to save up that amount of money. And while absolutely everybody can and should have an emergency fund, saving one does take time and diligence and a lot of effort. It’s easy to think that someone else just snapped their fingers and was able to put aside this volume of money into their fund, but that’s just not the case. It takes time and commitment.
If you were the type of kid who always asked ‘are we there yet, are we there yet?’ then this episode is going to help you. And let’s be honest, I think we’re all guilty of asking ‘are we there yet’ sometimes because we like to be able to see what it is we’re working towards. We like to know where we’re going and how long it’s going to take to get there. So naturally, when I teach about emergency funds, the question everybody has is:
How Long Will It Take To Fill Your Emergency Fund?
The true answer to this question is that it varies for everybody. How long this will take you depends on factors like how high your necessary living expenses are, what your income is, and how much you can cut back on your spending temporarily so that you can divert those savings into your emergency fund. Annoyingly vague answer, I know.
You can calculate roughly how much time it’s going to take you to save by creating a basic budget for yourself. To do this you want to start by writing down your after tax income, and then recording all of your monthly necessary living expenses. Then, look at how much you have leftover after paying your living expenses (don’t forget your debt payments if you have any), and set up an automatic transfer to send that leftover money straight into your high interest savings account each month so that you can start to build your emergency fund. Once you know how much money you want to have in your emergency account, and how much you can contribute to it every month, you’ll be able to calculate how long it’s going to take you.
If you do this exercise and don’t feel like you have any money leftover at the end of the month after paying your necessary living expenses, then I recommend going through a spending tracking exercise like what I outlined in last week’s episode. Tracking your spending is going to help you identify areas where you may be able to cut back on your spending for a while in order to start saving this extra money for your fund.
Some people can fill their FU Fund up in a few months, while it’s not uncommon for other people to need a few years to fill their emergency accounts. Instead of focusing on how long this is going to take you, focus instead on finding every possible area where you can save money to fill your fund up faster, so that you won’t have to be working towards this goal for as long.
To give you a real life example, when I first started my emergency fund I was in my early 20’s and I’d just started my first business. Starting a business can be risky, so I had a huge fire under my butt to get my emergency fund filled as quickly as possible so that I could create some job security for myself as an entrepreneur. My goal was to save 12 months worth of necessary living expenses because I felt that my job security was low running my own business, and I knew I needed a larger emergency fund to feel comfortable. I started my fund and dumped a chunk of money into it right away to get started, but saving up to a full year’s worth of living expenses is a lot of money to save, and it took me almost two years to get that account to where I wanted it to be. It took two years of diligence and contributing consistently to my fund to reach my goals. Don’t expect it to magically happen overnight, trust the process, and trust that the feeling of security you’ll get from having this fund is going to be so worth the dollars and cents that you’ve saved to build it in the first place.
The biggest tip I can give you is don’t allow yourself to get frustrated and give up on things that take a long term commitment. Everyone romanticizes the goal but dreads the execution, so you need to keep a laser focus on that goal of filling your emergency fund, and weigh every unnecessary purchase against the amazing feeling you’ll get from having that safety net for yourself.
How To Fill Your Fund Faster
It does take most people a while to get their emergency funds to the level they want them to be at, but there are a few things you can do to save a lot of money faster. I created a whole lesson around this a few months ago called ‘10 ways to save your emergency fund up faster’ so if you’re looking for some money saving ideas, I’ll link that episode in the description as well so you can take a look at it and get some ideas after this.
The idea behind filling your emergency fund up faster is that you can make temporary spending sacrifices to achieve your goal faster, and then you won’t have to sacrifice so much in the long run. It’s so much easier to sacrifice some of your daily spending luxuries when you know that it’s for a short period of time to reach your end goal. And honestly it’s so worth making these sacrifices for a few months because when you’re done you’ll find that it changes your whole relationship with money from one of fear and anxiety and lack, to feeling like you’ve got things under control and can handle what life throws your way.
I recommend checking out that lesson I just mentioned for a list of 10 great savings ideas, but I want to give you a quick example here of a great temporary sacrifice to create a long term gain. If you’re trying to fill up your emergency fund, and you have the luxury of continuing to live at home for a little longer, or to move back home for a few months, I absolutely recommend you do that and save yourself thousands of dollars worth of rent money. If you’re putting each months’ worth of saved rent towards your emergency fund, you’ll be able to fill that account up really quickly. And then, when you move into your own place, you can feel so much more secure there knowing that if something happens like losing your job, you’re not going to also lose your apartment the next month, because you’ve got that emergency fund to see you through the rough patch. Making that temporary sacrifice of living at home or with roommates for a while longer, gives you the long term gain of having security in your living situation because of your emergency fund safety net.
Start to weigh each of your spending decisions against this. Ask yourself if you need to spend your money on this thing right now, or if you can put it towards your emergency fund instead. It’s a temporary sacrifice, and you’ll feel so much better about spending your money on that same thing later once it doesn’t impact your financial security.
Always keep in mind that you’re not miserably saying no to spending money forever. These are temporary decisions you’re making to reach your emergency fund goal, and then you really do get to enjoy the ultimate luxury that it affords you of knowing that you’re going to be able to handle anything life throws at you without having money problems making it all feel impossible.
Saving an Emergency Fund Vs Saving a Retirement Fund
Saving up your emergency fund is one of your top financial priorities. This means it should come before almost everything else other than paying your living expenses and keeping up with any debt payments you might have. People often get confused though about whether they should be saving an emergency fund, or just saving to invest for their future. And I want to clarify that having an investment portfolio is NOT the same as having your emergency fund. Tonnes of people ask me this, if they can just draw from their investments if they have an emergency, and these need to be two completely separate accounts! I’ll use a recent example to explain why.
Think back to March 2020 when the Covid 19 Pandemic began. Almost overnight parts of the world shut down, tonnes of people lost their jobs, AND the stock market took a huge plunge. Now imagine if you had been one of the people who lost their jobs. Suddenly you would find yourself needing to dig into your emergency fund, BUT if you’d been keeping it invested in the stock market then you would have lost a lot of your emergency fund in that corresponding crash. Suddenly this emergency fund you’d been counting on, would have only had a fraction of the money that you needed anymore. Whereas if you’d kept that fund in a high interest savings account, none of it would have gone anywhere when you lost your job, and it all would have been available for you to use to fund your living expenses until you got a new job and got back on your feet again.
So, keep it separate from your investment accounts. Let me say that again, never invest your emergency fund. Keep that cash liquid so you can take it out anytime you need it. And people always push back against this and say, ‘but then my money isn’t growing, it won’t keep up with inflation, what good is it to me keeping a bunch of cash around that isn’t growing?’. BUT, this fund is not your growth money, this is your safety money. These are two separate funds that should be kept in separate accounts. As we just discussed, it probably took you a long time to save up your emergency fund, and you never want to put yourself in a position where you could watch 30% of it vanish overnight. That’s not fair to yourself, and the risk to your financial security is not worth the small amount of growth that you could get from a few months worth of living expenses. Just put it in a high interest savings account, the one I use offers a 1.25% return, and just accept that as your growth because it’s safe.
Hopefully this episode helps you create some more reasonable expectations for yourself around how long it’s going to take to fill up your emergency fund. It’s completely okay and completely normal if it takes a really long time. Commit to it, stick with it, and I promise the feeling of freedom you’ll have once you’re finished is going to be so worth every penny you pinched over the last few months or years to get there.
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