Step 1: Emergency Fund

emergency fundWelcome to the first step in personal finance. The first step, and undoubtedly the most important step, is to have an emergency fund.

If there’s one thing in life that’s certain, it’s uncertainty.

How is your job security? We can’t control whether or not we’ll be fired tomorrow or where next month’s rent is coming from. What we can do however is control how we react to certain situations based on preventative measures.

That’s why we have an emergency fund and that’s why

Having an emergency fund trumps ALL!

Have a huge credit card debt with 1000% interest?

I don’t care, build your emergency fund.

Your friend tipped you off on the next hot Apple stock?
I don’t care, build your emergency fund.

It’s raining outside and you don’t have an umbrella?
I don’t care. Go get your ass wet and build an emergency fund.

“But I should pay off debt so I’m not giving away free money to credit card companies.”
You should but how will you do so if you lose your job?

Or if you get a flat tire and have to swipe in order to get 4 new tires because the Mr. Tire Company told you that having uneven tires will wear down the tread faster and could cause damages to your alignment?

What? You got your girlfriend pregnant and now you gotta pay up some bills? swipe swipe swipe

Having an emergency fund will help in times of uncertainty. Real life happens to all of us and it’s important to be ready. Ever heard of “Pay yourself first”? This counts.

So how much do you have saved up in an emergency fund?

First you will want to calculate your monthly expenses to get an idea of how much you need to survive through a month if you didn’t have a job. Then put aside enough in a savings account to cover it.

Ideally you will want 3 to 6 months worth of expenses in your emergency fund in case anything happens. Although if you have a lot of debt to pay off, saving up for 1 one month is a great starting point until you can whittle out more cash.

To illustrate, let me outline an example:

Expense Amount
Rent $800
Utilities 100
Gas 100
Phone/TV/Internet 150
Groceries 200
Total $1350

This is the amount of expenses one can expect to pay each month in this example. Save up $1350 and stick it into a savings account. Never look at it unless you need to. This is your rainy day fund. This is the money that’s in that jar sitting atop the highest of kitchen cabinets.

If you think you’re in a situation where you can contribute more, then aim for 6 months. What you’re buying is time. If you lose your job, you have 6 months to find another one. If you’re in an accident, you can pull out from this fund instead of swiping, and then slowly rebuild it over time.

Once you have your emergency fund set up, you can start attacking your debts.

Continue your journey on step 2.

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