Alright, so you want to be a millionaire as soon as possible right? So your looking at all different ways of leveraging your income, be it real estate with income properties, maybe investing in the stock market, or even starting your own business.
It all sounds good on paper. Someone else paying the mortgage on your rental, or the stock market averaging X% percent a year. Hey…you can’t lose right?
What happens when Murphy’s Law slaps you right in the face? You get a call from your rental that the furnace went out, or your tenant just left and now your paying the mortgage, or the stock market just took a dump? Or heaven forbid you just lost your job. Ah! Are you going to run to the credit card at 20% APR or take out a personal loan at 15% APR?
Nothing is ever perfect so you need save yourself from…. yourself by establishing a safety net in the form of an emergency fund.
So What is an emergency fund?
So what is an emergency fund? Well it is money set aside to cover those life surprises that will come up. Not may or might, but will. It’s purpose is to improve your financial security by giving you access to cash to handle those unexpected events while allowing you to avoid the need to take on high-interest debt options like credit cards or personal loans.
An emergency fund should not be considered a fund that is accessible for investing. You DO NOT touch it unless you need to cover an emergency. Sounds boring earning 1-2%, but you’ll be happy it’s there when you need it.
So How Much?
Your emergency fund should ideally be equivalent to a minimum of 3 to 6 months of expenses. Depending on what your threshold for risk is….strive for 6 to 12 months of expenses. Having an empty rental or job loss will have big dollar signs, so more is always better.
The average mortgage payment is around $1500 per month! If a tenant left and your struggling to find a replacement do you have $1500, $3000, $4500, lying around to pay the mortgage? Yeah, $4500 is only 3 months.
What about if you lost your job? Not only are you covering the mortgage but you have all your other liabilities, such as your car, student loans, food expenses, utilities, etc.
Start putting dollar signs and amounts on those monthly expenses and it starts to be eye opening how much you need to tuck away. Three months of expenses may be $10,000 or more! Do you want $10,000 sitting on a credit card just dragging you down into a debt spiral?
Automate – Out of Site – Out of Mind
So where do you keep your emergency fund?
Keep your stash somewhere that your impulses can be kept in check. Look into online high yield savings accounts, as they typically require a 3 day transfer period to allow you access to large sums of funds, this gives you a chance to control that impulse of buying that shiny new thing you saw on Amazon today.
Also, make it painless by automating your savings plan to cushion your fund. Have a percentage of your income direct deposit into your emergency account. If you don’t see the money initially in your checking account your more likely to keep yourself accountable.
If you want to stay on the path of tremendous wealth building and financial success an emergency fund is an essential cornerstone to your overall financial health as it prevents you from making costly mistakes such as liquidating your investments, taking on credit card debt, or loans.
If you don’t believe me on the importance on having an emergency fund listen to an inspiration for my wife and I, Dave Ramsey, below.
So what are your thoughts? We would love to hear from you! Leave a comment below or send us an email via our Contact Page.
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Categories: Financial Essentials