Why Building an Emergency Fund Should Be Your First Financial Goal
For people early on in their financial journey sometimes it can be intimidating where to get started and focus your efforts. If you have a lot of debt, little savings, and barely enough to make ends meet, what do you focus on first? Unfortunately, most Americans are in this exact predicament.
About 76% of Americans are living paycheck to paycheck, without the ability to come up with $400 if an emergency arose. Every time I see these statistics I shudder a little bit. It’s a very scary and stressful situation for someone to be in. You know your finances aren’t how you want them to be, but it’s overwhelming to know what to do.
My personal finance journey was sparked about two years ago. My wife and I were staring at $27,000 of student loan debt with only a little bit of savings. I realized it was time to take hold of our finances and manage them properly.
I started learning as much as possible, and the more I learned, the more I loved it. Many financial advisors, such as Dave Ramsey, suggest that the first step to improving your finances is to build up at least $1,000 in an emergency fund. Once you’ve completed this first goal, you can turn your attention towards paying off your debt.
Even this small amount can have a big impact. It gives you some peace of mind and can also help you avoid putting emergencies on a credit card that you’re unable to pay off. It’s also incredibly motivating to set a goal and then accomplish it. Later, when the going gets tough, you can look back and be encouraged that you were able to set and complete your first financial goal.
My wife and I live in the Bay Area, where cost of living is incredibly expensive. We decided that $1,000 was not nearly enough to cover us in case of an emergency, and so our first step was to save up to a point that would give us a little more breathing room. We made this our first priority before starting to attack our debt, and it has come in handy multiple times.
Emergency Fund in Action
We recently took our dog in for an unexpected visit to see the vet. 10 minutes later we were saddled with a $300 vet bill that we hadn’t planned for. These are the exact type of expenses that your emergency fund can protect you against. If we hadn’t been diligent in building up an emergency fund and had been living paycheck-to-paycheck, we would have had to put it on a credit card.
Getting an emergency fund started is simple. The best way to do this is to open up an online savings account at a completely different bank (we use Ally Bank). Then this money is “out of sight, out of mind” so you’re less tempted to spend it. You know it’s there in case of an emergency, but it’s not staring you in the face every time you look at your checking account balance. As the saying goes, “pay yourself first,” which means put some money towards your savings as soon as your paycheck comes in, before paying for any other expenses.
The best way to do this is to set up an automatic transfer into your emergency fund, scheduled to happen the same day your paycheck hits your checking account. You won’t notice the money leaving your account and you’ll slowly be building up your emergency fund.
Thanks to our emergency fund, we were only worried about our dog’s health, instead of also being worried about how we’d pay the bill. The last thing you want in an emergency situation is the additional stress of worrying about the financial implications.
The best way to improve your financial situation is to start by building up at least $1,000 in a separate emergency fund. Having this money will give you some security and peace of mind that you’ll be able to handle whatever life throws at you. Once you’ve accomplished this first goal you can work towards building it up to 3-6 months of your baseline expenses, pay off debt, and begin to build wealth.