You know that terrible crunching sound of metal on metal—that unexpected noise you hear when you accidentally back into someone’s car in a parking lot?
Just 30 days after I got married, I had the unfortunate experience of hearing that noise when I backed into an elderly man’s car with my SUV. The good news was that no one was hurt, but I felt terrible. The car door was bent in the wrong direction!
Our deductible was $1,000—and that’s a lot of money! But, fortunately, Winston and I had planned for days like this by having a full emergency fund. Without that in place, a difficult situation could have been even worse.
The Emergency Fund Is a Must
Emergencies are going to happen. You can count on it. That’s why, before you even start to get out of debt, I want you to save $1,000 in a small emergency fund.
"Emergencies are going to happen. You can count on it." @RachelCruze
That $1,000 will add a little cushion between you and the inevitable—the flat tire, the broken air conditioner in your car, or that unexpected trip to the pediatrician.
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If you have zero savings right now, then $1,000 might feel like an impossible number. But it’s not too hard if you really put your mind to it. You can save $1,000 by just selling some stuff around the house, cutting out restaurants for a month or two, or taking a break from movies and entertainment for a short period. You might even get a part-time job.
Later, after you’ve paid off all your debt, I want you to build that emergency fund up to three to six months’ worth of expenses. This is your fully funded emergency fund, and it’s there to take care of everything from minor setbacks, like a flat tire, to full blown life-changing events, like getting laid off.
One great thing about the emergency fund is it allows you to focus on the emergency itself instead of worrying about how you’re going to pay for it. A problem with your car stays as a problem with your car and doesn’t become a money problem too. I can’t tell you how much of a relief that is! When you have a full emergency fund, you have a huge protection from stress and anxiety.
Make It Separate . . . and Leave It Alone
So where do you keep your emergency fund?
All you need is a basic money market or savings account. The point is you need to be able to easily and quickly access the money. This isn’t the place to get fancy and look for a high-interest account. It’s just a simple emergency fund.
The last point: Don’t touch your emergency fund unless you actually have an emergency! It’s not for dinner or a new television or movie tickets. Emergencies only!
Once you build your emergency fund and make a habit of saving, you’ve laid the foundation for a money plan that has the potential to change your life. With savings in place, you can attack your debt, then invest, pay off your house, and give like never before.
Get your emergency fund in place, and I bet those events—like my fender bender experience—that used to be emergencies won’t even feel like emergencies anymore!
Learn more about saving, avoiding debt, and quitting the comparisons in Rachel Cruze’s upcoming book Love Your Life, Not Theirs. The book releases in October, but you can preorder it today and get $70 worth of free digital items!
Rachel Cruze is a seasoned communicator and #1 best-selling author, helping Americans learn the proper ways to handle money and stay out of debt. You can follow Rachel on Twitter at @RachelCruze, online at rachelcruze.com, or at facebook.com/rachelramseycruze.