You need an emergency or rainy day fund to protect you against all of life's unpredictabilities. But saving up 3-months to 6-months of living expenses can be a difficult and tedious task, one that can be so discouraging that you give up altogether. To build up your rainy day fund correctly, you need to do it quickly. Read below for 3 time-tested ways of building up your rainy day fund quickly so you can move on to bigger and better things in your wealth-building.
3-month to 6-months of living expenses saved? - That's so much!
The typical 3-month to 6-month emergency fund is a decent chunk of change and it's not that easy to accumulate that much cash very quickly. You usually want to err on the side of caution and go for a bigger emergency fund (eg. 6-months of living expenses instead), but many people struggle with accumulating half a year of living expenses. Half a year of living expenses isn't the same as half of your income (it should be significantly less), but it's still a respectable amount and that amount can be difficult to accumulate when you have all of the other expenses gnawing at you (expenses like credit card payments, student loan payments, rent/mortgage, car payments, gas, and the basic necessities of lie). Life is expensive and it's understandable that so many people don't even manage to accumulate a reasonable rainy day fund.
It's hard...but you must do it
The fact that life is hard and that we have many expenses, however, is no excuse to not have a proper emergency fund in place. Life is random and unpredictable. You are doing yourself and your household a deep disservice by not having a proper emergency fund in place to shield you against the storms that will inevitably come your way.
Slow and Steady Doesn't Always Win the Race
Slow and steady saving might be good for long-term wealth building, but not for your emergency fund. For your emergency fund, you want to buckle down and use grit, discipline, and short-term self-denial to quickly build up your stash of cash so that you can move on to bigger and better things, secure in the knowledge that you have your emergency fund in place as insurance against all life's unpredictability. By quickly building up your emergency fund, you can channel your energy into a single purpose and you can quickly accomplish what will otherwise be a dreary and frustrating task (accumulating many months of living expenses by saving only a small percentage of your income).
Use the Following Strategies to Quickly Build Up Your Emergency Fund
1. Get a Temporary Second Job
Get a second job doing something on the side. Dave Ramsey's pizza delivery job has been the classic recommendation, but today many more options are available. You can drive for Uber or Lyft if your car meets the requirements. You can tutor if you have skills that are in demand. If you have the skills, it might be possible to do some freelance consulting. Even a weekend job as a cashier is a decent short-term gig if it helps you supercharge your emergency fund savings.
2. Sell Stuff
Selling stuff is a tried and true way of getting your hands on some cash quickly. Some people have more to sell than others, but if you have things that you aren't using anymore, try to put them on eBay or Craigslist.
3. Cut Down Big Time
Most households have some fluff-room (that's not a technical term). What I mean is that most households aren't just buying the basic necessities, but are instead buying extras luxuries. It might be possible to buckle down and cut out a lot of unnecessary (although pleasant) expenses for a short while. It obviously won't feel great while you're doing it, but it's not for long and once you have your emergency fund in place you can go back to a normal lifestyle secure in the knowledge that you have a cushion of cash in place against all of life's crazy unpredictabilities.
Pull Off the Bandage Quickly
Pull off the bandage of having to save up such a significant amount of money quickly. You can take your sweet time, but taking so much time will discourage you and taking a lot of time means you're not investing in the markets. Your emergency fund is not your wealth and its only function in your wealth-building is as insurance - insurance against the unpredictable that allows you to not have to touch your invested money. That's a key point to keep in mind. Don't waste time but instead build up your rainy day fund quickly using the tactics above. It may not be pleasant, but it will benefit both your pocket and your mind if done correctly.
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The common financial rule of thumb says that you should have 3 to 6 months of living expenses in your emergency fund. But what does "living expenses" actually mean? To calculate your monthly living expenses, you need to combine the amount needed to maintain your household's physical and mental-well being along with your other monthly required payments. Surprisingly, it is possible for your monthly living expenses to be quite a bit less than your normal monthly spending. Read the full article below to find out your monthly living expenses and be surprised at how reasonable they can be relative to your income.
The common financial rule of thumb is to have 3 to 6 months of living expenses. Although this might not be right for everyone, it is generally a good rule of thumb because it balances the costs of having a significant portion of your wealth in cash (and possibly earning so little that inflation is eating away at it) with the benefits of having a cushion of liquid funds available should a financial storm strike. Inquisitive minds will follow with the following question: What do you mean by "living expenses?" This is an excellent question because the rule of thumb states that we need to look at living expenses as opposed to income.
Living Expenses ≠ Income
Living expenses are not income, but instead mean the total amount of money needed to provide for the needs (as opposed to wants) of you and your household, maintain financial security, and keep you out of financial default. In a financially healthy situation, living expenses should be substantially less than your pre-tax income and less than your post-tax income by a significant amount.
Note: If you find yourself in the unsustainable situation where your monthly living expenses exceed your monthly income, you are headed for a financial catastrophe (unless you're expecting some sort of windfall) and you should immediately attempt to remedy the situation.
How to Calculate Your Monthly Living Expenses
First, Cover Basic Necessities
To get at your monthly living expenses number, we will first focus on the expenses required to maintain immediate life, health, physical, and mental well-being of your household:
Food: This is the amount you will need to spend in a month to feed your household with nutritious, but inexpensive meals. This does not include gourmet items, going out to dinner, or alcohol. Focus on cutting down on the luxurious or superfluous items and purchase nutritious staples and necessities. If you are a typical US household, for example, it might be possible to get by relatively easily for a few months on as little as half of your normal (non-emergency) monthly food budget.
Drinking Water: This should include the amount spent on quality but generic water for your household. If you have a water filter at home, your drinking water expense could be minimal. If you purchase bottled water, it is wise to transition to generic brands instead of name brands during your financial emergency (or during the time you're replenishing your emergency fund after a financial emergency). Buy in relative bulk and bottle your own water in order to cut down on costs. As with food expenses, it is possible for a US household that buys premium bottled drinking water to cut their drinking water expense by as much fifty percent.
Shelter: This is a less-flexible expense because you can't get out of your apartment or house quickly (and most likely wouldn't want to for a short-term financial emergency). If your emergency is of an unusual nature or if you don't have a permanent place to live, you will want to provide shelter for yourself in other ways (eg. crash on a friend's couch for a short period of time, stay with parents or other family members, rent a hotel room, etc.). You want to make sure you have enough money to maintain your shelter during the financial emergency, although this likely won't be a big problem because maintenance is usually a relatively infrequent expense.
Heating and Cooling: You'll want to make sure you maintain your home at a livable temperature, but it might be wise to buckle down in a financial emergency and put up with a bit more physical discomfort than you would in normal times. Too hot? Open a window and drink a cool glass of water. Too cold? Put on a sweater.
Medical Care and Medication: Don't skimp on required medicines and medical care but see if it is possible to transition to generic brands if you are in a financial emergency. This includes required medications, regular checkups, and emergency and urgent care visits. This also includes pressing mental health needs. If you need to see a therapist or mental health professional to maintain your mental and emotional well-being, make sure to account for this. A financial emergency isn't a great time to forsake necessary or beneficial mental health care or counseling.
Other Necessities: Other necessities will include toiletries, paper towels, required clothing replacement, gas for your car to get to work and school, car maintenance, etc. These expenses should be looked at with a disciplined and prudent eye so as not to purchase superfluous items. During a short-term financial emergency, a significantly smaller amount of money can be allocated to these items with relatively little discomfort.
Next, Stay Current on Your Payments
After we have taken care of the basic necessities, we will need to tabulate your required monthly payments in order to properly calculate your monthly living expenses. You want to stay out of financial default and maintain any sort of insurance you have in place even in a financial emergency, so it is important to account for the following:
Credit Card Payments: You can include your minimum estimated monthly payments here, but the more you include the better given the relatively high interest rates on most credit cards
Student Loan Payments: Include your required student loan payments
Insurance: Include the amounts needed to maintain your health, car, homeowners, life, umbrella, long-term care, and long-term disability insurance policies as well as any other insurance policies you may have in place
Car Payments: Include your car and lease payments
Other Payments: Other payments might include a child's tuition to school or college, child support payments, spousal support payments, or payments from a court case that you lost.
Remember That Each Situation Is Unique
Remember that this is a very general guide meant to be used by a variety of people. Your situation is unique and it is possible that your monthly expenses may be different by a little or a lot from what we discuss here. Things such as the number of dependents, unique family situations, unique jobs and businesses, unique medical or mental health needs, or unique lifestyles might cause your situation to be different from the typical scenarios discussed here.
What Did We Learn?
If you're a true financial nerd you can put numbers to each of the above items and calculate the current projected monthly living expenses for your household (it's only going to be a projection because things are random in this world and things can change at any moment). If you're not yet a hardcore financial nerd, it might be enough to just glance over the items and roughly estimate the amount needed in your mind (provided you understand that this will be a less accurate estimation of your monthly living expenses). Either way, you will likely come to the conclusion that your true monthly living expenses as needed to calculate the size of your emergency fund are less than what you currently spend on a monthly basis. This is generally true fro the following two reasons:
Although your monthly living expenses don't have to be the size of your actual monthly expenses, it is wise to remember that a conservative approach will lead to a more robust emergency fund and a more resilient financial situation for you. Err on the side of caution and don't be overly aggressive in estimating how much you can cut down during a financial emergency.
I know it's not fun reading the above - no one wants to cut out their premium bottled waters, their dinners out, movies, app and music purchases, premiums soaps and shampoos, or anything else they enjoy doing. If you're in a financial emergency, however, it is wise to buckle down for a bit until you get back on your feet. Discipline and short-term self-denial can be excellent tools for quickly recovering form a financial emergency minimally scathed. The knowledge that you can buckle down and survive with a diminished lifestyle for a short period of time is useful in figuring out how much money you'll need in your emergency fund.
In conclusion, you don't need to use your monthly income when calculating your emergency fund - your monthly living expenses are likely to be significantly less than your income. Additionally, you can cut out extras and luxurious and only focus on the necessities described above when calculating your monthly living expenses. This will allow you to get a better and more accurate picture of how much you need have in your emergency fund and you'll see that you can fill up your emergency fund much more quickly because of this. However, remember to not be overly optimistic about how much you can really live on - be realistic with a conservative outlook and you should be fine.
Any required expenses you think that were missed? Please let us know in the comments below and we’ll update the article with your valuable feedback.
Further Reading: How big should your emergency fund be?
This is a topic that’s been covered by every financial blog, podcast, book, or show, but we’ve got to cover it here as part of the basics because a proper emergency fund is a basic necessity to financial well-being and financial health and I refuse to give it short shrift just because it’s a readily-covered topic.
The traditional advice has been to have a 3-month to 6-month emergency/rainy day fund. That 3-months to 6-months doesn’t mean you have to have enough in your emergency fund to replace your income, it only means you need to have enough to cover only your expenses for 3 to 6 months. For example, if you make a household income $80,000 a year, 6 months of income would be $40,000. However, if you’re smart with your money and live below your means, your monthly expenses are likely less than your monthly income. It might be the case that $20,000 would be sufficient to cover 6 months of living expenses.
Why 3 to 6 months, however? Where did that number come from? If more is better, why not go for a full year of expenses? Why not two years? That’s tough to answer and there might be possible reasons for going beyond 6 months. For some conservative people or for those who believe there are rainy days ahead, a full year of living expenses might be reasonable. However, the larger your emergency fun, the more money that is sitting outside of the markets and earning very little interest. There is an inherent trade-off between the security that comes with an emergency fund and the growth that can potentially occur from having funds invested in the markets (be they equities markets, bond markets, real estate, or other investments) over the long-term. Be mindful of that trade-off when you are choosing the size of your emergency fund.
An important principle in creating your emergency or rainy day fund is conservatism. We want to make sure that we err on the side of caution: it’s better to have too much than too little. Additionally, having a conservative approach will make us keep our emergency or rainy day fund in a very safe place, namely a simple saving or money market account. An emergency fund isn’t an investment, it’s insurance for all of your other investments, protecting them from potential liquidation should an emergency occur during some sort of economic downturn.
Online savings accounts have been around for about a decade and provide a solid alternative to traditional savings accounts. You should have a 3 to 6 month emergency fund at minimum and you need to keep that emergency fund liquid and readily accessible. Traditionally, such an emergency fund would be placed in a bank savings account. Today, however, excellent alternatives exist: an online savings accounts. There are 2 primary benefits to having and using an online savings account for your emergency fund or for whatever else you're saving up for.
1. Higher Interest Rate: As of this writing, interest rates are at historic lows. The Fed might raise rates soon, but it will likely be years before rates reach historically normal levels. Big banks today offer rates that are almost insulting. Some banks offer rates as low as 0.01% in the United States and in Europe negative interest rates exist in places. Although the purpose of your emergency fund or your liquid savings (eg. down payment savings or imminent college payments) isn't to make a large return, you would likely prefer something better if it was possible with the same amount of risk. Online savings accounts don't have the expenses traditional bank accounts have because no branch network is needed. This can be seen in the graphic above and should make complete sense. This savings is passed on to the saver in most cases as a way of attracting people to use an online savings account instead of a traditional brick and mortar bank. If rates were the same regardless, most would prefer a brick and mortar bank due to the added ability to walk in if needed. Even if you do most of your banking online, this would add some sort of convenience and given equal interest rates, you would likely choose the brick and mortar option. The rates aren't equal, however, because online banks offer much higher rates than traditional brick and mortar banks.
2. Delayed Accessibility: We've stated that an emergency fund should be easily accessible and that liquid savings that will be used soon should also be very easily accessible and not invested in the various markets (eg. equities, bond, real estate, etc.). Keeping this in mind, online savings accounts create a slight but beneficial barrier between you and your money by requiring (usually) a transfer into your traditional checking account at a brick and mortar branch before a large purchase or withdrawal can be made. This is a very slight barrier that doesn’t stand in the way of allowing quick accessibility to your liquid funds. If there is an emergency, a two-day delay will likely cause any problems because you will likely have some money in your checking account to withdraw, you will have credit cards to use if needed, or two days will be enough time to get your hands on your funds. Most financial emergencies are not of the nature that require absolute immediate obtainment of funds (although some are – so you should probably keep some cash in your checking account and some cash in your wallet and at home for those time sensitive emergencies).
Although I wouldn’t keep all of my liquid cash in an online savings account, I would keep a majority of it there. Always be wise and prudent with your money and make sure the online savings account is with a reputable firm and that it is FDIC insured. Additionally, shop around for rates and online experience. It’s the 21st century and your online bank should have a high quality website and mobile app experience.
Having a stash of cash is critical for a peaceful life. Cash is like the grease for life. Grease helps a machine operate smoothly. Cash helps your life operate smoothly.
Need to make a move? Need to make a quick trip? Want to seize a new opportunity? Unexpected expense? Having a nice pile of cash will allow you to operate smoothly and more effectively, even if it's not the only thing that's important for effectiveness.
That's why I think you should have more than just the requisite 3 to 6 month emergency fund. You obviously shouldn't forgo real investment opportunities that will grow your wealth by hoarding cash, but you should make sure you keep some powder dry for those unexpected events, both good and bad.
We all know (or should know) that having an emergency fund is a crucial part of successful financial planning. Having a rainy day fund is one of the first things people should do when getting their finances under control.
An emergency fund although part of your overall financial picture and financial portfolio, should not be considered a part of your investments. Although you should search for a good rate of return on your emergency fund, safety must be your primary focus when choosing a place to put it. It is best to think of an emergency fund as a type of insurance policy. Thinking of your emergency savings as insurance will allow you to get a better or better-rounded grasp of your emergency fund's place in your overall financial portfolio.
When you purchase insurance you are paying a premium (usually on a monthly basis) for the assurance that a certain risk will be covered should the underlying event occur (or not occur in some cases). For example, when you purchase car insurance you pay a monthly premium and in return you and your car are insured. If something happens to you or your car while driving the insurance company will cover the tab less your deductible. We purchase insurance to insure against risks that we cannot bear ourselves or risks, should their underlying event occur, cause financial disaster for us. Insurance, for most people, comes out to a net loss. Over your lifetime you will pay more for the insurance you purchase than you will receive as having been insured. We still purchase insurance, however, and the reason we purchase it is not because it is a profitable venture (it isn't in most cases), but because we want to be protected from catastrophic events so that we can focus on the rest of our life and continue building wealth.
Your emergency fund is like an insurance policy. Instead of paying monthly premiums, however, you give up potential return on your money by having it in a very safe financial vehicle (eg. a savings account). Instead of investing your money in stocks, real estate, or other ventures, you keep your emergency fun in a savings account, CD, or in liquid cash. It is very likely that inflation will be slowly eating away at your emergency fund’s purchasing power, especially with today's historically low interest rates. You are giving up potential returns on your money and likely losing real value for the assurance that you will have a pile of cash sitting there should an emergency occur. This allows you to both focus on all other aspects of your life with and increased sense of security and insures your investment portfolio (which should be invested in various ways to maximize long-term returns). If an emergency arises, you don't have to liquidate your investments. Consistently having to liquidate investments will be disastrous for the long-term growth of your investment portfolio and could be catastrophic should you be forced to liquidate in the kind of deep financial downturn we witnessed in The Great Recession.
You will be well-served by understanding the real role that an emergency fund should play in your overall financial picture: that of an insurance policy where you accept lost returns and lost purchasing power for added security.
Many people think that saving money and investing it is hard. They feel that saving is on the opposite spectrum of fun and that it involves scrimping, denying yourself, and harsh self-discipline. Saving does involve self-discipline and can be difficult at times (especially for those who are less-inclined to do it and for those who are new to building wealth), but like many difficult things, it can be very rewarding and even very fun.
I love saving money and seeing my accounts grow. When I earn money, I plan to put a portion of that money into a savings account or into my investment portfolio. It might be that I am a natural saver and that I have a general propensity to save (due to early experiences or due to genetics), but I love spending too. I enjoy nice experiences and nice things and my friends and family know me as a very generous and giving person (of course I am able to be very generous because I am a conscientious and diligent saver).
I love everything that has to do with saving money and building wealth. I enjoy picking investments or screening mutual funds or ETFs. I love seeing my balances grow and monitoring my investments. I love the security that comes with seeing my wealth increase and how it allows me to be a better friend, better family member, and better person overall. I love how saving is fun to do on its own and how it allows me to have a much more enjoyable life.
I don’t view saving as self-denial because I understand that some expenses don’t happen every month. I know that some expenses occur every year, every five years, or once in a lifetime. I know that when I save I am allowing my future self to bear those expenses calmly and easily. I know that when I save I am acting as a mature adult and demonstrating an important characteristic that sets humans apart from other animals: planning for the future.
If you don't view saving the way I view it, that's fine. You should still do it anyway because that is what a responsible adult does. However, I believe that if you stick to it long enough and see some success with it, you will feel similar to the way I feel about saving.
And now, given the rise of cyrptocurrencies and crypto assets to quasi-mainstream financial assets, we're dedicated to providing quality, relevant, and interesting material on cryptocurrencies and cryptoassets. Articles on Bitcoin, Ethereum, Ripple, Cardano, and many more cryptocurrencies and cryptoassets can be found on Pennies and Pounds - all that in addition to a plethora of information on what cryptoassets are, how the entire crypto industry came to be, blockchain/immutable ledge technology, mining, proof of work, proof of stake, and how to prudently invest in crypto if you are so inclined (based on your risk tolerance and ability to withstand the volatility that will come with a crypto portfolio).