Probably one of the scariest questions to ask – “What’s In Your Emergency Fund?” But it’s pretty important, especially in today’s economy.
We don’t claim to have all the answers here, but a recent discussion with someone in the trenches led us to think…gee, it probably would be a good idea to talk about the emergency fund. In this case, 5 steps to building an emergency fund, as inspired by a discussion with someone living – as a good chunk of us are – paycheck to paycheck.
To paint the fullest picture, here’s a brief description of our pal “in the trenches:” White Female, Single, 35-49 demographic. Renter, not an owner. Working multiple jobs to make ends meet – and that’s where we met her, at one of her jobs, where she was a marketing representative for a local company. (Industry not important, so we’ll keep that to ourselves.) We’ll call her “Betsy.”
In this discussion, which started with Betsy talking about the product and then led to a wide-ranging discussion that lasted about 20 minutes, we learned a few things. And, among them, this fact: “What’s In Your Emergency Fund” is a dangerous question for most of us – because the answer is probably…”Very Little.” (If Anything at All.)
The World of Work Has Changed
Betsy is a “1099” – lingo for the fact that she’s a contractor, but not technically an employee. Raise your hand if you’ve been a 1099 worker in the past few years…and I bet quite a few hands will go up. Without getting into legalese, think of it this way – if someone tells you that you have to be at your post at certain times, and they monitor your hours, and check in on you all the time…it’s possible that you are NOT a 1099, but, instead, an actual “employee” who needs to be on a W-2. If you do contract work – where you can come and go as you please, or you’re working on a project where your attendance is not required at certain times, then putting you on a 1099 is okay.
The distinction is a slippery slope, and why, again, you should get legal advice.
ADVERTISEMENT: Try FICO Score Watch – get your first month at only $4.95.
But our discussion started talking about the product she was repping, then led us to how she works, followed by her 1099 status, then to the fact that getting paid as a contractor is a PAIN IN THE TUKUS.
(Did I spell “tukus” correctly?)
Anyway, at one point, she had a rather blunt discussion with her employer – or the company she contracts with – to say that, well, honestly, she needs to get paid in a timely fashion.
Needless to say, the emergency fund, for Betsy, is a pie-in-the-sky dream.
We’ve Been There, Betsy
Here’s why the emergency fund is so important – and why every little bit set aside here and there, now and then, can make a really big difference.
The folks who have regular paychecks from “the man” – and don’t begrudge them, please – might have an advantage in that “the man” can be the one to set aside the money for you. Or you can ask your bank to do it, too – when you get direct deposit, it’s really easy to “set it and forget it” and have a certain amount go into savings each time you get paid.
Contractors, uber-freelancers, solo practitioners and others, though, might think they’re at a disadvantage because they’re not seeing anything happen on a regular basis. One company may be “Net-7,” another may be “Net-90,” and another may agree to paying you a deposit up front.
How DO You Create an Emergency Fund?
The experts tell you to start small. Every little bit helps. And they also tell you that you need 3 to 6 months of living expenses. ARRRGH!
Despite that seemingly contradictory advice – start small, save big – we prefer something in the middle. Start big, save small. What?
Here’s What WE Mean…
I just wrapped up a contract stint – not unlike what Betsy does, but unlike it because I wasn’t a 1099er. Instead, I was hourly, and I was paid about a week after the work was completed. This had some advantages to the 1099 route: someone else handled the payroll, someone else handled the taxes, and I was eligible for a 401(k) plan.
I started big a couple ways. One is through my bank – where my savings account got paid the minute I got paid. That part about paying yourself first? It’s so easy to do when you have someone else do it for you.
Tip #1: Automatic withdrawals from your paycheck into your savings as soon as you get paid.
The amount is not important – you could do a percentage, you could do a dollar figure, whatever. The fact that you do it is the most important thing.
Tip #2: Think long-term, and divide that out into little chunks.
Let’s say you are planning a trip, but the trip is way in the future. (For instance, you have a newborn and you want to take that kid to see your grandparents, but they live in Italy. It’s not too far-fetched, so work with us.)
Imagine you want to take the kid to Italy, but you’re not planning on going until the kid is two. You have two years to save, and you want to do this trip right, so you’re looking at a whopping $10,000 for you, your spouse, and your kid.
How many paychecks do you think you’ll have between now and then? How many months? Find some regular yardstick, and divide that out.
With two working spouses being paid every other week…two years to go…that’s 104 paychecks before the trip. $10,000 divided by 104 equals…$96.15.
We’re doing something similar here – and we’re using an often-ignored checking account to do the trick. We have to do a little work – transferring the money each paycheck – and the checking account is only used for this purpose and the auto-debit for the gym membership. ($20 a month. We’ll discuss those pesky automatic debits later.) But we’re on our way…AND, if we have a MAJOR emergency, we have something we can tap into.
Tip #3: Max out on retirement.
We don’t advocate tapping into that retirement before your actual retirement. But we do advocate making building that nest egg in parallel with your emergency fund.
If you’re so lucky – as we were – that you can take advantage of the tax-deferred savings of a 401(k) – even WITHOUT the company match – park that money away. Do it. Do as much as you possibly can (we did 12%, figuring that number allowed us to bring home money for expenses, save for rainy days, and still have a little left over).
Tip #4: Couch cushions.
We were rather exhaustive earlier in our talk about looking under the couch cushions. But looking under the couch cushions – don’t take that literally, or even figuratively – is a great way to find money for emergencies.
Little things add up to big things – we can’t even begin to estimate what we’ve saved from all the soda we’ve given up, or the tap water we drink instead of the Fiji. And so on and so forth…
Tip #5: Don’t get overwhelmed.
The receipt above? That can scare the crap out of you – it’s a lot of money. It’s an unrealistic goal for most of us.
This is also why the 3-month or 6-month goal is just that – a goal. It might be a sensible goal for you, it might be gosh darn crazy for you. Start where you are, build what you can, aim where you want to aim.
Then take those baby steps. You’ll be glad you did.