Emergency fund: Why you need one and how to build it

Life can be a bitch. Bad things happen. And, weirdly, they tend to arrive in bulks. Not only your car breaks down, but the washing machine dies away, too. Not only is he cheating on you, but with your best friend, of all people in the world! Not only do you lose your job, you are finally pregnant on top. O.k., not all things are bad, but they may add to the challenge. And oftentimes, lack of money turns the challenge into an emergency situation where you end up washing diapers in the bath tub because the money designated to a new washing machine now goes into diapers.

One of the most crucial lessons I learned was to always have some emergency money in store. Back in the days, when I complained about being broke my friends used to smile condescendingly, knowing this meant my budget was used up, not I that had no money left.

Whether you lose your job, a client doesn’t pay you on time, the energy bill has doubled or you need to pack your kids and run away from an abusive partner, having saved up some money to start all over or simply buy a new laptop can be just what makes going on possible. Hence, I want to encourage you to set up an emergency fund for yourself. Knowing you can handle a catastrophe gives you peace and strength, and it will help you deal with situations in such a way that they might not turn into emergencies in the first place.

Emergency Fund
Keep your emergency fund safe
How much money do I need?

In general, I’d suggest to aim for 3-6 months’ net income. That is an amount which can help you through hard times when you cannot earn any money. If you already have an emergency stock and developed the habit of saving regularly, take the next step and save enough money to support you and your family for a year.

But if you only just started, and saving several thousands of Euros sounds just too far off, start small. Setting small goals and reaching them will encourage you to go on. If you never owned 50 bucks which were not already spent, then making them your emergency fund can have a huge impact on your self-esteem. 50 € can buy you a taxi home if your date turns out to be a moron. 50 € can feed you for a whole week. You get a second hand washing machine for 50 €.

Remember, this is your emergency fund! It is not the money you save to get that fancy 1,500 € turbo washing machine!

Consider your situation. Are you employed with guaranteed pay during sickness or maternity leave? Then you need less money compared to someone who is a freelance dancer and loses her income the minute she breaks a leg. You are a housewife and your partner earns all the money, and enough money to substitute household items as soon as they break? Talk to each other what happens should something happen to him or her. And make sure you have some money at your personal disposal just in case.

Are you crazy? I barely live, how can I save up money?
Funnier names for your emergency fund
Give your emergency fund a more inspiring name so you actually put money into it: Emergency Fun!

Many people assume that you have to earn ‘more’ money to be able to save some. But you know what happens when you earn more money? Your lifestyle evolves and you end up having just as little money left as when you had less. Even people who win the lottery end up broke, oftentimes worse off than before the win. Why? Because saving and spending behaviour are habits. And you can build those habits no matter how your income situation currently is.

Imagine I gave you 100 € to spend on your own. What would you buy? Now imagine I only gave you 99 €. Can you still buy what you wanted? I guess so, because just 1 € less doesn’t really affect your wealth. It’s 1%. Put it away. Make it a habit to save 1 out of every 100 € you spend. Better, and much easier: Put away 1% of your income as soon as it comes in. Open a new bank account for it or store it in cash away from your household money. Put it into a nice box. Don’t touch the box for any other reason than putting money in!

1 % is not much. If you want to reach your goal faster and can afford it, save more. Just make sure you do not save money in your emergency fund which you would much rather spend on your next holiday. That is not what the emergency fund is for!

O.k., I have the money. And now what?

You made it! You wrote down how much money you need in your emergency fund. You saved it up. You stored it safely. Now make sure you do not spend it, except on an emergency. Meaning: What you buy is absolutely necessary and cannot be paid right now from your normal income. You do not buy stuff which is out of your range. You do not give it to someone else because he or she is in need. You tell nobody about the money. You don’t touch it. And should you ever need it the next thing you do is to save enough money again and replace what you took away.

Every now and then, you should check whether your emergency fund is still appropriate for your likely emergencies. Do you have to increase it, or can you take some of the money out and invest it better because your lifestyle has changed and you don’t need so much anymore?

The amount of money you saved monthly can now be saved for other things, e.g. adventures, future investments or for your retirement. Or you just use it to enhance your daily lifestyle.

Whatever you do: Have fun!

Do you want more help? Drama free your Personal Finances!

You feel like being an entrepreneur puts special pressure on your financial situation at home and you need someone to help you gain control? Whether you can’t sleep at night because your business income changes with the seasons, or you want some advice on how to manage multiple income streams, or you can’t be bothered to track expenses and get surprise-bills on a regular basis:

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