I wish I had an Emergency Fund in May 2017. I had just gotten back from a family trip to California, where my brother used to live, and I had spent a lot of money there — about 1500$.
I knew that when the bank would reduce the payments from my account on the following month, I would be in big trouble. Not only did I not work for an entire month, but I also took those days as a no-payment vacation. That meant I had to find money to cover those expenses and fast.
You’re probably asking yourself why didn’t I take those days as vacation days from my workplace? The answer is simple — I was not happy there, and I planned to leave. I finally went in September 2017. I didn’t want unnecessary deductions. In hindsight, it was probably better to have those days deducted from my last paycheck instead of suffering from bank issues as I did. Nevertheless, it was a fantastic lesson in managing my finances as you’ll soon see.
I Searched For Ways To Cover My Expenses
So, I had to cover those expenses fast, and I couldn’t find a way to do it. Asking for help was out of the question because I felt too much shame in revealing I had money problems. What other assets did I have? What solutions could I use?
I asked the bank first if I could take out a loan for the required money. My banker is online, so I don’t have to go to a branch to get service. I asked him if he could help out and he went to check. A few hours later, he returned a phone call and said he couldn’t help out and that I will have to cover the expense somehow. Thanks, buddy, super helpful.
I was out of options. I should have just told my parents, but I didn’t want to do it when I was in an emergency. I wanted to do it when I can say to them, “I need you to know that this is the situation and that I’m handling it.” I finally did it but only recently.
I did find one solution, a bad one, but I didn’t have any other options: Pension money.
“I knew this was entirely my fault for not planning correctly or sooner. I didn’t answer phone calls, and I left my credit cards (I had more than one) at home. Anxiety was a close friend during those days.”
My Pension Money Was The Only Solution
The workplace I used to work for until December 2016 opened a Pension fund for me. In Israel, part of the money saved each month for Pension is for damages. I was eligible to withdraw that money from the Pension fund since that workplace fired me as part of closing the company.
Withdrawing money from a Pension fund is a slow and agonizing process. I had to fill so many papers and send so many scanned documents. By the time I had received a confirmation that the pension manager would deposit the money in my account in around 5–10 business days, it was already too late. The payments were deducted from my bank account and blown my credit limit to bits.
The bank, as often banks do when people can’t pay their obligations, returned the payment to the credit card company. These returns were the start of a long nightmarish week until my Pension money would come in and save me.
The Bank and Credit Card Companies Wanted Their Money — Fast
I had received phone calls every day. I also received threatening letters. Every time I would log into my bank account on the web I would get a pop-up from the bank, “Please talk to us ASAP about your bank account number XXX you’re over your credit limit..”
Sleep wouldn’t come. I knew this was entirely my fault for not planning correctly or sooner. I didn’t answer phone calls, and I left my credit cards (I had more than one) at home. Anxiety was a close friend during those days. I cried at night, I was wary of any spending and I wanted to avoid people who might ask me to pay on something.
I wanted this week to end as soon as possible. Every minute of it was agonizing. I hated the fact I kept it all in and had no one to talk to about my struggle. It was my fault for keeping it all a secret.
When the Pension money got deposited, I could finally relax a bit. Solving this struggle felt bitter-sweet. I may not receive threatening phone calls anymore, but I also seriously hurt my future savings. This withdrawal from my pension was a blow to my future self. I prevented from him some essential money.
As I let the thoughts swirl in my mind, one thought became more and more prominent. What if I already had this money at the ready in my bank account? The idea of an Emergency fund started forming itself in my mind. Only later, when I would finally research how to do it, have I figured out how to make and maintain an Emergency Fund.
The Benefits Of An Emergency Fund
According to Dave Ramsey — an expert in getting people out of debt — an Emergency Fund worth one month’s salary is a good starting point for anyone trying to float above their debt and money problems. This fund would have solved my problem too.
If I had an emergency fund, I would not have needed to take out my pension money, and I could have survived one month without a salary. How many people who are not rich can say they would have survived one month without a paycheck today? Not many.
Not only did my financial situation wouldn’t have deteriorated to the point credit card companies actively look for me, but I also would not have spent so much mental energy on this issue. I would have slept normally, and I would not have damaged my mental health so much for worrying about my finances like so many people do, every day.
An Emergency Fund prevents you from making reckless mistakes. Instead of taking small loans from your credits card, an emergency fund fills the role of an external source of money. Such a source helps you when unexpected issues arise or when your planning is a little off.
Instead of always worrying how you would manage if you got fired or had a huge surprise expense (like fixing the car after an accident or medical payments), you can rest easy that at least one month will be covered. You will have one month where you can feel the security of money in your pocket while you fix your finances. Dave Ramsey suggests that somewhere along the way, you need to have an Emergency Fund of an entire year of salaries. Imagine that — a whole year of not working but still managing to get by.
Even the simple thought of it makes me more relaxed.
So, how to do it? How to create your first Emergency Fund? It’s easier than you think!
Set up Your First Emergency Fund
For this guide, I’ll assume some simple things so that calculations can be easy.
- Your Net Salary is 1000$ a month.
- Your monthly expenses cover 50% or less of that amount.
- You’re spending less than you earn, even if you are in debt.
These assumptions are in place because if you’re spending more than you earn, you should fix that balance first before attempting to create your Emergency fund. It will not help you stay on top of your finances if you’re on a course of inevitable finance breakdown.
With these assumptions in place, let’s begin.
1. Figure Out Your Monthly Payments
First, before you set aside money to an Emergency Fund, you need to figure out how much you spend each month.
We assumed you’re spending less than 50% of your salary each month (I know, it’s practically a dream to have 50% of your salary available monthly, but bear with me).
So you have about 500$ to invest in your Emergency Fund every month. But wait, wouldn’t you eat? Wouldn’t you drink? You can’t put everything into the fund. That’s why you need to choose a percent of your salary that will be deposited there each month.
2. Put Twenty Percent Of Your Salary Into The Fund
Twenty percent is quite an arbitrary number, right? Twenty percent of a thousand dollars is 200 dollars.
You will put 200 dollars into your Emergency Fund, and you will have an entire salary worth in five months.
But maybe some months you can put less than that? Maybe some months you can put more?
3. Your Emergency Money Need To Be Available 24/7
You need to be able to deposit or withdraw on a moment’s notice. Don’t close the money. This isn’t money you’re going to get an interest rate on or invest anywhere. It’s money to be used in case you need it in an emergency.
Check with your bank what deposit plans they have that will allow you to put the money away from your primary checking account, but still access it in a moment’s notice.
4. Stop Depositing When You Have A Full Salary
Now that you have 1000$ — a month’s salary — saved and accessible in a moment’s notice, this is when the relaxation will come.
Soon, it will dawn on you that you can now perhaps search for a new job. Even if you would have a couple of weeks of no-work between workplaces, you can handle it now. You’re allowed to take measured risks now.
Remember, this is Emergency money. Don’t use it unless it is an emergency.
5. Update Your Emergency Fund As Your Salary Grows
Let’s say you got a raise and now you earn a net 1200$ a month. It’s time to deposit another 200 dollars into your Emergency Fund. It needs to be able to retain your salaries. It can’t do that when it has less money than a regular salary you earn.
Keeping the fund updated with your salaries will serve you well in a real emergency.
You’re probably thinking, “well, now that I have the fund figured out it’s time to invest in some stocks or stuff like that, no?” Well, no. Not yet. There is still one step before you can start doing what you want with your excess cash.
6. Make An Emergency Fund For One Year
Remember that Dave Ramsey guy I mentioned earlier? Well, I haven’t read his plan to get people out of debt, but I did read many articles written about him and this plan. One thing that came out in all of them is the Emergency Fund and how you should have one for a year in case you have excess cash.
If you’re making a lot of money, well, good for you! I’m not jealous at all. Just kidding, I am. I’m very jealous.
In any case, you should be able to take care of yourself and your family for a year before you start investing and putting your money in the hand of people who might lose it. Don’t ever put your financial well-being into someone else’s hands. Excess cash outside of your yearlong Emergency fund is money you can allow yourself to lose (even though you should probably not put it in high-risk stocks).
Congratulations, You’ve Set Your Emergency Fund Successfully!
Isn’t it wonderful to go to sleep knowing that no matter what life throws at you financially, you can now take it on?
As you can see, this isn’t a short process. You can put as much or as little as your salary allows each month and you should also do it once you’re in balance with your earnings and expenses.
But let me tell you, it’s worth it. I’m building my own Emergency Fund these days, and I love the idea of sleepful nights. Once my Emergency Fund is ready, it will be time to start the Snowball. But let’s save that for a different story.