One friend mention im emergency fund for ordinary talk and you come realise say you get strong mind to save but you no sabi wetin di first target suppose be. Dat na beta place to stand, because na question wey get real answer, and di answer small pass di one wey you don dey avoid.
Plenty advice dey open with three to six months of expenses, wey correct eventually but e no dey help you today. From zero, three months no be goal, na wall, and goal wey you no fit picture yourself reaching na goal wey you go quietly stop to fund by week five. So di first target na one month of your fixed cost, inside separate account wey you no carry card for. Dis piece go cover how much, which account, how to move di money enter without leaning on willpower, and wetin di thing really dey for, wey na di part almost nobody dey explain.
How much my first emergency fund suppose be?
One month of your fixed cost. No be one month of income, and no be one month of everything wey you spend last month: house, light and water, insurance, transport, minimum debt payment and ordinary food, add am up one time.
Dat number dey usually small well pass wetin people expect, because fixed cost na only one part of wetin you dey spend, and say e small na di whole point. Most people fit reach am inside one year if dem dey save small amount every payday, and to reach am na wetin dey prove say di machine dey work. Di Consumer Financial Protection Bureau refuse to name one universal figure for exactly dis reason and dem dey tell people make dem size di target against dia own past unexpected expenses, wey be better instruction pass any rule of thumb.
Write di figure down as one specific number, no be as idea. Cushion of two thousand two hundred na target. Cushion of "few months of expenses" na wish.
Which account I go keep am inside?
Separate savings account for bank or credit union, no card attach and no shortcut for your phone home screen. Di friction no be decoration, na di whole design.
Three requirements, no more. Di money must dey safe, meaning insured deposit and no be inside anything wey fit fall di same week wey you need am. E must dey reachable inside one or two days, because cushion wey you no fit reach during bad week no be cushion. And e must dey separate from your spending money, because money wey dey your checking account go don finish by ordinary Thursday without you even make any decision about am.
Interest na nice extra but no be di point. You go earn very small on one month of fixed cost, and to dey chase small small better rate na exactly di kain optimising wey dey keep people for zero for anoda year. Open di account for whichever bank you fit open one dis week, and you fit move am later if you like.
Name di account something plain and specific, if your bank allow am. Balance wey dem label "cushion" hard to raid on Friday night pass di same balance wey dem label "savings", because di label don answer di question wey you for dey argue with yourself about.
How I go really move di money enter?
Automate one transfer for di day after payday, never di day before. Set am, den leave am: di Consumer Financial Protection Bureau call recurring transfer from checking to savings one of di easiest ways to make saving consistent, and na di one change wey get di best ratio of effort to result for personal finance.
Di day after payday matter pass di amount. Money wey move before you look your account na money wey you never get chance to get feeling about, and na feeling dey stop transfer. Start with amount wey truly boring. If twenty-five every payday boring and two hundred dey fear you, start with twenty-five, because small transfer wey survive di whole year beta pass big one wey dem cancel for March.
Two accelerators, if you want dem. Raise di transfer di same day your pay rise, before your spending get chance to move first. And send irregular money straight inside as e land: refund, bonus, reimbursement, anything wey never dey your monthly rhythm and wey you no go miss.
Wetin cushion really dey for?
Na to buy you decision. Cushion no dey stop di surprise, e dey stop di surprise from turning into decision wey you go make for eleven for night with credit card for hand.
Na di whole return be dat, and e worth far pass any interest wey di account go ever pay. With one month for bank, car repair na purchase. Without am, di same repair na loan, na fee, na late payment for somewhere else and three weeks of divided attention wey you needed for your real work. Di Consumer Financial Protection Bureau research on emergency savings find serious difference for credit profile, debt, ability to meet financial obligation and financial well-being between households wey get different levels of savings, and di Federal Reserve yearly survey of household finance dey exist to track exactly dat kain exposure.
Cushion na also di difference between wanting to help somebody and being able to help: with one month of fixed cost for bank, you fit cover your padi flight or quietly clear one bill from person desk without am turning into your own emergency di next week.
When I go move from one month to three?
When di one month don sidon there untouched for full quarter and di transfer no need any willpower at all. Dat na di sign say di machine dey run, and na only den bigger target go be plan instead of wish.
Den raise di target, no be di effort. Three months na di standard next step, and six make sense if your income no steady, if you dey work for yourself or if na only you dey earn for your house. Keep di same account, di same transfer day and di same rule about card. Nothing about di method change, na only di finish line.
One thing wey you no go do: no start to invest before di first month exist. No be because investing risky for long run, but because without buffer, di first surprise go make you sell something for whatever price di market dey offer dat week, wey be how beta long-term decision dey turn bad short-term one.
Cushion na decision wey you don already make
Di reason why dis one belong for category about earning more, no be only about saving, na because cushion na wetin dey allow you act like person wey get options. You fit wait for di better offer. You fit tell di client wey dey pay late say no. You fit comot from job wey dey cost you pass wetin e dey pay. None of dem dey available to person wey next unexpected bill go be emergency for am, and all of dem worth far pass di balance imsef.
So pick di number dis week, open di account, and set one transfer for di day after payday. Na one month of fixed cost, e small pass wetin you think, and na di cheapest mind wey you go ever buy.
Sources
- Consumer Financial Protection Bureau, An essential guide to building an emergency fund
- Consumer Financial Protection Bureau, Emergency Savings and Financial Security: Insights from the Making Ends Meet Survey and Consumer Credit Panel
- Federal Reserve Board, Survey of Household Economics and Decisionmaking