From time to time we like to check in with our followers on social media and see how they manage their financial lives. Today we happened to meet Steve Goodwin via Twitter. He runs a website titled, My Family Budget, and was kind enough to share his top 3 tips for saving money in an emergency fund.
The conversation started when Steve mentioned over Twitter that his family recently achieved the financial milestone of setting up a 6-month emergency fund for the second time. His comment was a response to an article I recently published about the importance of creating an emergency fund to stay debt free when unforeseen expenses meet you in life.
The idea of setting up a second emergency fund intrigued me and upon inquiry, I was told that the first one had been used up to replace a worn down vehicle using cash instead of credit. Kudos to them!
The target for both the first and second emergency funds was $15,000 for a period of 6 months, which implies that this sum of money would have been able to cover their expenses for half a year if the bread winner were to lose his/her job. Some people like to keep an emergency fund worth one year’s expenses, while others prefer to start with a much smaller target of a month or two.
Steve revealed that the first emergency fund took over a year to save for but the second time over the duration was significantly reduced to 9 months with a bit of aggressive saving, budgeting and investing to support their saving efforts. Here are his top 3 money hacks for building an emergency fund:
- Budget every month and cut as many extra expenses as possible,
- Invest money to support savings,
- Put the money in a bank account that is not easy to access, i.e. there should be no checkbook or ATM card associated with that account.
These personal finance tips are pretty intuitive and in my opinion, the third one is extra helpful because it ensures your savings remain safe from impulsive spending decisions. Some people may prefer to invest their emergency fund savings into an asset that is less liquid than cash, such as a gold coin or even some real estate, while others prefer to keep them in a savings account at the bank. Of course, each type of asset has its pros and cons and every individual must determine which option is best for him or her.