Steps to Financial Independence: Step 3

Photo: How will you pay for this emergency expense?

This is the third article detailing the steps to reaching financial independence.  To read more about the steps, then click on this page link.  To read more articles in this series click on the following links.  Step 1Step 2Step 4 and Step 5.

Air Conditioning goes out.

Car breaks down.

Sewer backs up.

Window breaks.

A blown tire.

Are you prepared for the next emergency in your life?

How many of these things have happened to you?  How many times have you had to use a credit card to fix these emergencies?  Do these type of expenses put stress on your monthly finances?  Can you pay these expenses with cash?

These items once affected me, when I blew a tire driving down I-10.  I was not expecting this expense and I definitely was not ready for this expense.  Life is full of little expenses and these expenses seem to hit the people who are broke the most.  New tires are no longer an emergency for my wife and I, but in 2011 it was an emergency for me.  I didn’t have the funds to pay for the new tires, so I had to take a pay day advance.

Now, we have an emergency fund built up based on the amount of expenses that we have on a monthly basis.  This is important, because whenever something comes up, we can just use the money that has been set aside for emergencies.  Thus, allowing an emergency to not affect the monthly budget.  

This step is all about making sure that you have money on hand to take care of life’s little emergencies.  We want you to be able to handle these emergencies without the emergencies getting in the way of your financial success.  I personally believe that your emergency fund should have at least 3-6 months of expenses.  The basis for whether you should have 3 or 6 months is dependent on whether the household has two incomes or one income and whether the jobs are stable.

If you only have one income in the household, then you should have 6 months of expenses saved.  This is because in the case of a lost job there would be no income in the household.  Having the six months of expenses on hand allows this family to search for a job, while still being able to pay the monthly expenses.  You would also have a six month emergency fund if either of the jobs in a household are unstable. 

On the other hand, a two income household with stable jobs only needs to have three months of expenses available.  My wife and I work in very stable industries, so we only have three months of expenses saved.  Just this year, I had an $800 car repair.  This repair did not bother or worry my wife and I.  Why not?  Because we had over $10,000 saved in case of an emergency.  This emergency was less than 10% of our savings.  We were prepared and it did not bother us.  

This leads me to next important point about an emergency fund.  An emergency fund gives you a sense of peace and it definitely allows you to have less stress.  One of the most the most stressful times in my life was when I blew my tire and I knew that I did not have the funds to pay for new tires.  That repair only cost $350.  But it stressed me out, because I was not prepared for any emergency.  It really is amazing to look at the difference between 2011 and 2015.  In 2011, I was stressed out about a $350 repair, but in 2015, I was not worried about an $800 repair.

Life is full of little emergencies.  Will you be prepared the next time something unexpected happens to you?  Do you want the peace that comes with having extra money saved?  Money, specifically the lack of money can be one of the most stressful things in life.  Take this opportunity to get your finances in order and build yourself a cushion between life’s emergencies.