My parent’s call it a “sinking fund” or a rainy day fund. It doesn’t really matter what you call it. An emergency fund is one of the foundational necessities to a healthy financial outlook.
Many people don’t have an emergency fund. In fact according to the FINRA Investor Education Foundation National Financial Capability Study carried out in 2015, 50% of Americans don’t have an emergency fund.
Are you part of the 50% that don’t?
In this post, I’m going to explain to you what an emergency fund is and why you should have one. I’m also going to detail a 52-week challenge you can undertake as a fun way of saving up a $1,378 emergency fund.
And, if you sign up for my mailing list below I’ll send you a free printable cheat sheet that I created for the money challenge which will help keep you motivated and on track with your saving!
If you want to learn how the challenge works, keep reading.
What is an emergency fund?
I’ve read a few finances books about debt over the past few years and many of these books recommend prioritizing some kind of emergency fund. Many suggest having 3 months worth of funds. Most recently I came across a forum that said $1,000 is a good place to start.
I’ve also read that an emergency fund should be large enough to cover all your living expenses for 6 months to a year.
There’s a fat chance I’m going to have one that big anytime soon! In fact, I disagree with that. I like to think of 6 months of living expenses to be covered by additional savings.
An emergency fund covers you in the eventuality that your circumstances change drastically overnight. You may lose your job, suffer ill health, need a new car or perhaps have to travel unexpectedly. A small fund of $1,00 covers you for emergency day to day problems that you may not have budgeted for.
A couple of the prime benefits to having an emergency fund are that:
- It reduces your stress levels knowing that you have a cushion, in case life throws you a curve ball or two (because that happens).
- It helps you avoid having to use high-interest debt such as credit cards if there is a problem.
- If you constantly contributing to your emergency fund you’re creating a habit of saving.
I had an emergency fund, until yesterday.
I didn’t have 3 months worth of living expenses saved up, but I had recently worked to build up $1,000.
I’ve had my fair share of health issues in the past. My current financial situation is partly to blame for them. I didn’t have an emergency fund back then. If I had, it would have been a God-send. Instead, I stressed out about getting better fast so that I could get back to work and start earning. I was a contractor on an hourly rate back then so if I didn’t work I didn’t earn. I had no holiday pay, no sick pay and didn’t have any medical or income insurance. It was not a good position to be in!The stress and pressure of not earning, and having no cushion meant that I returned to work far earlier than I was capable of, which likely hindered my long term recovery and I won’t get into what the stress did to me.
The stress and pressure of not earning, and having no cushion meant that I returned to work far earlier than I was capable of, which hindered my long-term recovery and the stress was crippling.
When should you use an emergency fund?
Yesterday I broke the cardinal rule of an emergency fund. I spent it on something that wasn’t quite an emergency, but with good reason. I used my emergency fund to pay off my credit card. Typically, this is not a good example of what an emergency fund is to be used for but I had some logic behind using it which made the figures stack up. If you’re ever in a position where you have an emergency fund and you’re wondering whether you should use it then I have a post that suggests you should ask yourself three questions first. Take a read, it’s helpful.
I find myself in a position where I now have nothing to fall back on in case a serious problem arises and I need to save the emergency fund back up.
I don’t think that will be a problem for me but just last week I came across a great way of saving $1,378 for an emergency fund and I really wanted to share it with you.
The challenge spans 52 weeks which breaks the task of saving such an amount into bite-size, weekly chunks and makes it fun. There is also a variety of ways to play!
The great thing is this method can be adapted to paying off debt rather than saving for an emergency fund. You can even give it to your children as a fun way to save! You can also start at any point in the year and work week to week.
Here’s how the 52-week challenge works
The idea, to make this a little more challenging (and potentially a little more fun), is that the contributions to your emergency fund each week come from savings you make on your weekly budget. This encourages you to squeeze more savings out of your shopping and further reduce your spending habits.
If you read my post about goal setting you’ll see there’s a bit of science behind drawing close to and reaching a goal and I think something like this would tap into those same primal instincts that are fed by our brain chemistry.
The long and short of it is that it will help spur on further savings to provide you with a nice cushion for a bad day.
Now, there are two main ways to “play” the 52-week challenge.
The 52-week emergency fund challenge – the normal way
The normal way is to build up your savings week to week. You start the first week putting away $1, the second week $2, the third week $3 and so on until you’re up to $52. Each week you enter the amount on the sheet, with the balance and cross the figure off the bottom panel.
By the end of the year, you’ll have saved $1,378!
The benefit to doing it this way is that it builds you up slowly to get into a habit of saving.
You could mix this up a little bit and do it in reverse, starting at $52 in the first week.
But I find both of these ways a bit boring, albeit sensible. I mean, where’s the challenge in that?
The 52-week emergency fund challenge – Yahtzee style
Yahtzee style is a little more living on the edge.
Ok, I know, that’s a bit dramatic, but it adds a little more fun.
This method is really based on around what you can afford which helps you save on the realities you face each week.
The aim is to start your first week trying to save $52. Each week you are trying to save as much as you can!
Now if you don’t save the amount you were aiming for, you cross the amount off for what you did manage to save. However, here’s the challenge. You can’t save the same amount twice, once a number is gone, it’s gone. I imagine the last quarter of the year could get pretty interesting once all those amounts start to get used up!
The point here is you aren’t failing if you have a bad week because there are lower amounts you can save.
However, a sensible strategy is to aim for the larger amounts first.
So for example, in your first week, you may only save $48 despite aiming for $52. You cross $48 off the base and write it in week one along with the balance. You can’t save $48 for another week because that amount has now gone. The second week you manage to save just $30, you cross off $30 off the base, write $30 in week two and place a balance of $78 ($48 + $30). The third week may be a really bad week and you only save $1 so you cross that off and add a dollar to your balance to take it to $79.
If you still think that’s a little primitive, you could go all in and play it a little Bingo style. Cut the numbers up at the base of the page, place them in a pot and pick one out each week. That’s the amount you have to save!
Are you up for the challenge?
I’m going to give this a go just because it’s a little bit of fun. Are you willing to join me?
I’m going to give the Yahtzee style a go. Let me know in the comments if you are willing to accept the challenge and come back to let us all know how you are getting along each week if you can!