“Lazy people should learn a lesson from the way ants live. They store up their food during the summer, getting ready for the winter.” – Proverbs 6:6
What is an emergency fund?
It is simply money that you can use when you need it the most.
How much should it be?
Ideally, if you are employed, it should be 3x your monthly expense. If you are self-employed, it should be 6x your monthly expense. If you are employed and your monthly expense is budgeted at $4,000, you must aim to build an emergency fund of at least $12,000 which is deposited at a high-yielding savings account for liquidity. On the other hand, if you are self-employed, your emergency fund should be set at $24,000.
Why the difference?
It is assumed that self-employed people will have more difficulty getting back to work than their employed counterparts. But with the current recession, the scenario may have reversed. Currently, the unemployment rate in Cincinnati, OH is still increasing in trend. For now, you can just aim for a more realistic goal of 3x your monthly income or expense, whichever is more attainable.
How do you start building your emergency fund?
Most financial planners would advise you to set aside 20% of your paycheck for savings. This has some biblical basis. In Genesis 41:34-36, Joseph advised the king of Egypt to set aside 1/5 of the crops during the seven years of plenty as a reserve supply for the years of famine. Note that saving occured first before spending.
What expense can be addressed by the emergency fund?
In the modern times, years of famine could mean unemployment, disability, and other circumstances that lead to financial hardships. The emergency fund can be tapped for unexpected expenses which are not part of the monthly budget like car and house repairs, medical expenses and the like. Effort should be exerted to replenish whatever is used in order to keep the fund intact.
What makes it difficult to build an emergency fund?
It is difficult to save when your expense is greater than your income. First, you must list down all your expenses for one month. Knowing where your money goes is crucial to personal financial planning. If you always leave a balance to your credit card, you will be surprised at how much you are paying for its interest. It might even be able to pay a week of grocery for your family! No matter how much you save, your credit card will drain a huge chunk of your savings like a huge hole in a water tank. When you use your credit card, treat it as cash. Only swipe that card for things that are within your budget so you can pay the monthly bill in full. Pay off all that balance so you will plug that hole that’s draining your budget. If you got a tax refund, use it to pay off all your credit card expense or start an emergency fund. Resist the urge to splurge it on unneccessary purchases.
God is not only concerned about your spiritual health. He is also concerned about your financial health. When the bride and groom ran out of wine in their wedding, Jesus changed water into wine. When the crowd that followed Jesus became hungry, He multiplied bread and fish to feed them.
Make a plan. “Ask the Lord to bless your plans, and you will be successful in carrying them out (Proverbs 16:3). You may make your plans, but God directs your actions (Proverbs 16:8).”