Financial emergency planning is a great way to prepare yourself for life’s twists and turns. And in our experience, the coming of those twists and turns is not a matter of if but when.
There are lots of situations that might warrant a financial emergency response from you and your family. An unexpected loss of income might require it, or even seeking costly medical care.
But any emergency can be stressful, and the last thing you probably want to think about is how you’ll be paying for it. It’s helpful to already have in place your emergency plan and a cash reserve that you can fall back on when needed. And in this article, we’ll walk you through the steps to creating your emergency fund.
1. Figure out how much you can set aside each month
If you’ve ever crushed debt with the Debt Snowball method, this works the same way. First, figure out how much income you bring in each month and compare that against your outgoing monthly expenses and other savings goals. That difference is how much you can set aside for emergencies, so write that number down.
2. Determine the right emergency fund amount that you’ll need
Before you can start saving, it’s helpful to know the target goal amount you’d like to save to. And, there’s no magic number here. Generally, though, many resources suggest saving between 3-6 months worth of expenses. That might seem like a lot, but remember, in the event of an emergency, you’ll probably be cutting out some unnecessary expenses, like Fun Money and Eating Out. So those 3-6 months of expenses should really only need to cover necessary living expenses. You can learn more about creating that lean version of your budget here.
3. Create a Goal Envelope in Goodbudget
Goal Envelopes are great for saving to a specific amount, so they work well for building your emergency cash reserve. When you use a Goal Envelope, you’ll be able to set the goal amount you’d like to save to, and give the Envelope a due date. When you do, Goodbudget will help you set aside the exact amount of money needed from your paycheck to help you get to your target amount by the due date. The object here is to make sure that the suggested amount is about the same as the amount you calculated in step one. So if you find that the number is more, then try setting the due date farther out into the future.
4. Start saving
Once you’ve figured out how much you’ve can set aside each month, determined your fund amount, and created your Goal Envelope, you’re ready to start saving! And the great thing about saving now is that you’ll have something — even if it’s small — set aside when your emergency strikes.