My commentary is laced throughout the article in blue so you can see a few angles on the important topic of building an emergency fund in difficult times.
You may be feeling the negative effect of the coronavirus pandemic and wondering how you can possibly build an Emergency fund as described in Dave Ramsey’s Baby Step 1.
A personal financial crisis is unpredictable, and often you cannot know when it will strike. Unfortunately, with the coronavirus pandemic, there are a lot of people who have been negatively affected at the same time.
Typically, when a lot of folks experience financial hardship simultaneously it often results in a recession. A recession is defined as a temporary economic decline for two successive quarters. While we are not quite there yet, we definitely seem to be heading there. Professionals have been predicting that this downturn will be deep but perhaps short. Fingers crossed it is short.
Firstly, you may want to check out the COVID-19 resource guide before delving into this article further. This guide can answer questions about what you can do if you are out of work or if you’re looking for work.
The purpose of this article is to provide a few options on how you can build an emergency fund. It’s always advisable to have some savings even if it means you have less to spend. When you’re budgeting, you should always plan for the unseen expenses that can arise. For instance, you could lose your job, your car breaks down, or a friend you are renting a property with leaves abruptly.
The above are some examples of financial burdens, and they can vary in size and severity. The best solution is having an emergency fund because it will ensure that you’re covered in some capacity.
You may wish to research adding a small source of income besides your full-time job. This is referred to as a side hustle. With a side hustle, you can decide to save some portion or all the extra income towards your emergency fund.
One of the great things about side hustles is that they give you experience in other fields as you earn and perform the tasks associated with it. Who knows maybe you’ll discover a new passion?
Some examples of side hustles:
- A part-time job (even now during the pandemic, companies are hiring. In particular, grocery stores, amazon & food delivery)
- Become a Rideshare Driver for Uber or Lyft. Or deliver food via Door Dash (the great thing about these side hustles is you choose when you want to work)
- Freelance writing (I see a lot of folks making some money in the personal finance community this way)Going Freelance? Do These Things Before Diving In by Women Who Money
- How I Increased My Freelance Income from $600 to $6K in a Year by money the Wright Way
- Exactly How 12 Power Freelancers Broke Through by Pennies to Paradise
- Laura from Every Day by the Lake does a lot of freelance writing and might be willing to share some tips with you if you reach out…
- House or pet sitting (House sitting is also a great way to travel the world cheaply) House Sitting; a Nomad’s Vacation by 43 Blue DoorsHouse Sitting Europ: See Breathtaking Sights on The Cheap by The Frugal Fellow
- Renting part of or your entire house or rental units on Airbnb
Financial Panther has a phenomenal article on the best side hustles. If you want to go this route I recommend you check it out.
You may wonder how budgeting can help you build an emergency fund. When you account for all of the money that is coming in and all of the money that is going out through techniques such as zero-based budgeting, you’re in a position to cut expenses and add more of these dollars to your emergency fund.
You may also be interested to use a budgeting app. Dave Ramsey’s Every Dollar works with zero-based budgeting. If you are looking for a Google sheets budget template, there are many good, free options out there for you to consider.
At Christmas time this past year, I hosted an every dollar subscription giveaway. While the giveaway is no longer valid, I did write a how-to article for using every dollar.
Debt Payoff Planning
So how might you prioritize your debt in a way that helps you understand how much you can put to an emergency fund? Debt payoff planning is essential to getting out of debt faster and easier. Most of these debt payoff planners will be able to tell you how much to pay towards a specific debt through debt payoff methods such as the avalanche, snowball, or a combo of both.
For debt payoff planners, you can search Google for a free printable template or you can also find a debt payoff planner that is more automated and will tell you how much to pay to each debt for those of you who are in a busy season of life.
Personally, when I was paying off my debt, I first saved up a small $1,000 emergency fund to ensure I wouldn’t need to accumulate more debt. I did this by selling old jewelry and other household items I didn’t need. Building a small emergency fund is key before paying down debt because it allows you to focus on your goal without fear.
Save for a Big Event
When you have savings, you can use it alternatively elsewhere in life. When a habit of savings gets into your mind, then you should do it continually, year in, year out. Having excess cash due to saving smartly does not happen by mistake. With your savings perhaps you can advance your education, take vacations, or implement your dream wedding.
It’s always nice to protect your hard-earned money and also the time lost when preparing for that big event. The events should achieve their goals of good life memories and joyous moments. Going the extra mile and doing some research on personal finance and budgeting while saving for a future big event will prevent you from future stress.
I personally, have several savings accounts for annual expenses that always pop up. In particular, I have a vacation and ski savings account which contains a decent balance so that when I’m planning for trips, I’ve already got the money set aside to pay for them. Sure, as I travel or ski, this account is drained but my automatic deposits continue to help build it back up.
With all my savings accounts, I do automate the money going into them each month. Most online savings accounts allow for this automation feature. The key is working it into your budget.
Lastly, I do have a big goal of someday buying a house and/or investing in rental property. By having an account for this, I can slowly deposit money each month to advance towards my goal.
One of the reasons you should have an emergency fund is to take care of the unexpected medical expenses which are expensive in anyone’s budget. It’s a position of strength to be able to cover unanticipated medical expenditures. Even if you are on insurance, it’s wise to have additional funds to cover expenses that will be your out of pocket responsibility. Insurance typically does not cover full medical bills. Therefore, having some savings aside can cover you or your family when such cases arise.
Even if you are on a healthy diet and exercise enthusiastically, fates and illness can always knock your door. In recent studies, more than 25% of families experience monetary loads associated with medical care. Also, families with low income have high chances of suffering this financial burden. A Harvard research study showed that medical expenses resulted in 62% of the individual bankruptcies as a result of medical hardship.
I highly recommend understanding your insurance policy and how much is your maximum out of pocket exposure. What is your deductible? What is your coinsurance? Also, what are your copays for certain episodes of care? Lastly, what is your maximum out of pocket? Because I work in the world of health insurance I’ve written several articles on this topic:
Thank you, Good Nelly, for the timely post. Having an emergency fund is something I highly recommend. However, if you don’t have one, perhaps during this pandemic you are realizing the importance of one. I hope you’ve found some of these tips helpful.
To review you can:
- Obtain a side hustle
- Build a budget
- Work an emergency fund into your debt payoff plan
- Automate your savings
Happy financial peace!