So… I always feel like a wet blanket talking about savings and emergency funds. But here’s the sad, necessary truth: If you’re self-employed, you need an emergency fund.
More specifically, anyone who’s freelancing or self-employed needs to have at least several months salary stashed inside the bank. Life has a nasty way of throwing curveballs our way, and having a few thousand dollars hidden away is crucial.
How crucial? Emergency funds can be the pillow that prevents you from bankruptcy, homelessness, or worse. Again: Necessary evil.
What Is An Emergency Fund, Anyway?
An emergency fund is money you have stashed away in a secure location–and a savings account is perfect for this–that you can tap into for situations like slow work periods, losing your day jobs, health emergencies, unexpected home repairs, emergency auto repairs, legal problems, or family emergencies.
In short, you need money stashed away in case of crappy situations that you can’t foresee. Because while you don’t know what is going to happen, you have a pretty good idea something will happen in the future that will be financially difficult.
The whole idea here is that you don’t want to depend on your credit cards in case of emergency. Credit cards charge interest on transactions, and paying even 15% interest on an expensive medical bill can be financially crippling. If you have $2000 on hand to pay for, say, an emergency auto repair, things are much easier.
How Much Money Should Be In My Emergency Fund?
Different people have different opinions on how much money should be saved away in an emergency fund. The consensus is to save between three to six months’ take-home salary (that is, the money you are left with after taxes) in your emergency fund.
At the very least, you want two month’s earnings in your emergency fund. The important thing is to have something saved away for emergencies–even $500 in the bank is a great start.
How To Save Up An Emergency Fund
The first step to saving up an emergency fund is having a place to put your money that’s secure and easily accessible. Under your mattress is a bad idea–you don’t want to lose your money to burglary or fire.
What you want to do is to open a dedicated savings account at either your local credit union or at an online bank like Capital One 360 or Ally. This savings account is separate from your main savings account, and is only for emergency savings.
Then, each month, put away some of your income. Almost Millions is a big fan of the 50-30-20 method promoted by Elizabeth Warren: For each paycheck you receive after taxes, use 50% for immediate necessities, 30% for things you want, and 20% for savings and paying off debt.
From each paycheck, after you put money away for taxes, put as much of that 20% as you can towards your emergency fund. Repeat for each paycheck you have.
When you’re saving up for an emergency fund, remember: It’s not a race. You want to put a little bit of money away every two weeks or every month. You want to put that little bit of money away regularly, over a couple of years, so it becomes a big sum of money. Then that big sum of money will be there in case something crappy happens.
One way to do this is to treat your emergency fund like a monthly bill: Every month, squirrel away money in there just like you’re paying your electric or phone bill. Online banks like Capital One 360 let you automate deposits as well, which is super-helpful.
And An Emergency Fund Is For Emergencies Only!
Remember: Your emergency fund is only there for difficult situations. Emergency funds aren’t for dipping into when you need money for your vacation, buying things for the house, or getting clothes for a new job.
Instead, your emergency fund is something you want to save for, you know, emergencies. Your emergency fund is your magic backup when something truly bad happens.
That’s why I recommend putting the money in a savings account you can’t access by debit card, and where withdrawing money requires a significant effort.
With that, here’s hoping you don’t need to use that emergency fund. But if there is an emergency, things will be way easier.