As you may or may not have already gathered from my about page and other posts, one of my life goals is to become better versed in the mysterious world of personal finance. Starting this blog was step one. Forcing myself to learn about investing is step two. Actually investing is step three.
This terrifies me.
As a female Taurus who naturally prefers stability, I’m simply not a fan of risk. I’m the type of girl who always wears a seatbelt in cabs, who gets to the airport 2 hours before her flight, and who orders food with the sauce on the side… just in case.
Lucky for me, after doing some research it seems like the majority of personal finance professionals out there suggest that we shouldn’t even think about investing until we have a proper “emergency fund” in order. Hello, procrastination – so good of you to visit! I’ll introduce myself to investing another day!
An emergency fund is a sum of money that equates to about 6-12 months of your living expenses. We need this because bad things happen (injuries, sickness, layoffs, home repairs, car accidents/car replacements, etc.), and when bad things happen to people who are prepared, they hurt a lot less.
They say 6-12 months of savings is the ideal amount for an emergency fund, depending on the level of risk you’re comfortable with (and you better bet that I’m aiming for a comfortable, risk-free 12 months of savings in my bank account).
You can also fondly think of an emergency fund as an “eff you fund.”
I was at dinner recently with some girlfriends/former coworkers and we were all discussing our current job situations. One of these friends was feeling particularly frustrated with her job and ready to make a change. We all weighed the risk of quitting without having another job lined up and while quitting without a solid plan seemed risky (the thought makes me very anxious), we agreed that feeling trapped in a job situation that you hate just because you need the money is the WORST. She explained that she and her husband maintain what he calls an “eff you fund” for this specific purpose - basically an emergency fund that allows them to make big life changes (like say “eff you” to a bad work situation) without much discomfort. GENIUS!
An eff you fund is also great leverage in negotiations – knowing that you have an eff you safety net can make ballsy requests seem less ballsy. This particular friend of mine ended up speaking to her boss and was ready to quit if her boss wasn’t willing to make the changes necessary to better her work situation. Her boss realized how serious the situation had become and ended up making some important compromises and fought for her to stay. Power, I tell ya! Feels good.
Now that you are thoroughly convinced that having a solid eff you fund is awesome, powerful, and necessary, how do you determine how much money you need to set aside?
Three words: track your spending.
I maintain an excel spreadsheet for this purpose (which I’ll talk about in more detail in a later post) but sites like mint.com are popular for easy financial tracking as well. Look at your average spending over the past 3-6 months then use that average and multiply it by the number of months you would feel most comfortable having on hand in case of an emergency. Don’t forget to include paypal/venmo expenses in your total spending (those ones tend to sneak by me!) and really be honest with yourself about how much you need to maintain your current lifestyle.
Once you have determined your savings goal - create a dedicated savings account and start saving y’all. I’ll be back with more posts on my favorite ways to save and set aside $$ for your eff you fund in the future, so be sure to check back each week or subscribe to my RSS feed to receive emails each time a post is published!