1. Figure Out Your Monthly Payments
First, before you set aside money to an Emergency Fund, you need to figure out how much you spend each month.
We assumed you’re spending less than 50% of your salary each month (I know, it’s practically a dream to have 50% of your salary available monthly, but bear with me).
So you have about 500$ to invest in your Emergency Fund every month. But wait, wouldn’t you eat? Wouldn’t you drink? You can’t put everything into the fund. That’s why you need to choose a percent of your salary that will be deposited there each month.
2. Put Twenty Percent Of Your Salary Into The Fund
Twenty percent is quite an arbitrary number, right? Twenty percent of a thousand dollars is 200 dollars.
You will put 200 dollars into your Emergency Fund, and you will have an entire salary worth in five months.
But maybe some months you can put less than that? Maybe some months you can put more?
3. Your Emergency Money Need To Be Available 24/7
You need to be able to deposit or withdraw on a moment’s notice. Don’t close the money. This isn’t money you’re going to get an interest rate on or invest anywhere. It’s money to be used in case you need it in an emergency.
Check with your bank what deposit plans they have that will allow you to put the money away from your primary checking account, but still access it in a moment’s notice.
4. Stop Depositing When You Have A Full Salary
Now that you have 1000$ — a month’s salary — saved and accessible in a moment’s notice, this is when the relaxation will come.
Soon, it will dawn on you that you can now perhaps search for a new job. Even if you would have a couple of weeks of no-work between workplaces, you can handle it now. You’re allowed to take measured risks now.
Remember, this is Emergency money. Don’t use it unless it is an emergency.
5. Update Your Emergency Fund As Your Salary Grows
Let’s say you got a raise and now you earn a net 1200$ a month. It’s time to deposit another 200 dollars into your Emergency Fund. It needs to be able to retain your salaries. It can’t do that when it has less money than a regular salary you earn.
Keeping the fund updated with your salaries will serve you well in a real emergency.
You’re probably thinking, “well, now that I have the fund figured out it’s time to invest in some stocks or stuff like that, no?” Well, no. Not yet. There is still one step before you can start doing what you want with your excess cash.
6. Make An Emergency Fund For One Year
Remember that Dave Ramsey guy I mentioned earlier? Well, I haven’t read his plan to get people out of debt, but I did read many articles written about him and this plan. One thing that came out in all of them is the Emergency Fund and how you should have one for a year in case you have excess cash.
If you’re making a lot of money, well, good for you! I’m not jealous at all. Just kidding, I am. I’m very jealous.
In any case, you should be able to take care of yourself and your family for a year before you start investing and putting your money in the hand of people who might lose it. Don’t ever put your financial well-being into someone else’s hands. Excess cash outside of your yearlong Emergency fund is money you can allow yourself to lose (even though you should probably not put it in high-risk stocks).