Hey, guys.
It's Chelsea from The Financial Diet.
And this week's video is sponsored by SmartyPig.
And if you have not already, please
do not forget to click the Subscribe and the Join buttons
to join our super secret society, and support us.
We're doing great work, in my opinion get on board.
And today we are going to be talking about one
of the most fundamental elements of building
your own personal finances and that is building your emergency
fund.
Because we often say to people that you really
can't do anything financially until you've got an emergency
fund, it's important that we address this regularly
on the channel as a way to get people started on their best
financial foot.
And we think that one of the easiest and most effective ways
to save up that initial savings buffer, which can often
be difficult with other conflicting goals
and bills is to set a dedicated emergency fund challenge.
But first, what is an emergency fund?
Well, an emergency fund is exactly what it sounds like.
It is a sum of money that you've saved
to cover unexpected and sudden financial strains that
go beyond your typical day to day expenses.
Sounds useful, right?
Except not everyone has one.
According to MarketWatch around 25% of Americans
don't have emergency savings.
CNBC'S estimates are even harsher, that only 39%
of Americans could afford a $1,000 emergency.
These stats aren't the result of laziness or lack of ambition,
they're the result of decades of income inequality.
Still as 2020 proved, you need to have a plan.
And the best time to start putting money into an emergency
fund is three years ago.
The second best time is now.
So that is why now is the time to challenge
yourself to either start or improve your emergency fund.
So we're launching the emergency fund challenge,
asking our viewers to either establish
or improve on their emergency funds
according to their own budgets.
And for this video, we're going to be
using an example of how someone could save $3,000
by the end of this challenge.
And before we dive in, when you do save your emergency fund,
it should be completely separate from the checking account
that you use on a daily basis.
A high yield online savings account is a great option.
And with the SmartyPig app, you can take your goal setting
journey one step further.
SmartyPig makes sticking to your savings
goals including reaching your emergency
fund simple and painless.
SmartyPig is a totally free FDIC insured savings
account that makes saving easy and rewarding.
Their goal planning system not only
helps you map out short term goals, like your emergency
fund, but also long term savings goals like a trip
to Italy or a car down payment.
SmartyPig was designed to put you in control of your own goal
planning and financial independence
by helping you adapt to a save then spend mentality then
be rewarded for sticking with.
It you can set up whatever goals you like
and then fund them with scheduled recurring
contributions from your existing checking or savings account,
letting you save without thinking about it.
And SmartyPig helps you stay on track
with a goal planner, helpful reminders, competitive interest
rates, referral bonuses, and more.
So click the link in our description
to open a SmartyPig account for free
and start saving for what matters to you.
Now let's understand what emergency funds should
and shouldn't be used for.
This money should not be used for things
like financing long term goals, like planning a trip,
or buying a car, or doing something proactive
and ultimately optional with your money.
If you find yourself dipping into your emergency fund
to help finance some of those goals,
you probably need to rethink how much you are actually
saving for them.
But when it comes to the actual emergencies
that this fund should be used for,
everyone is going to have different types of emergencies.
For example, not everyone owns a home or a vehicle,
so unexpected repairs on those things
are not going to factor in.
But perhaps you rely on a lot of tech equipment for your job.
So needing to repair or replace those items on short notice
could be considered an emergency worth tapping into the fund
for.
But by far the most common things
that emergency funds should be used for
are things like medical expenses that
are not covered by insurance or a sudden loss of income.
Now that last one happened for many, many people
across the country and the world last year,
which not only forced the question for many people of
do I have an emergency fund.
But Additionally is what I have in my emergency fund enough?
So what is enough?
Traditionally experts have said that you
should have three to six months of expenses in your emergency
fund or some have said three months of your net income.
But there is one problem with this though.
The average American debt is just over $52,000
and the average Canadian debt is just a little higher at $72,000
Canadian which is about $57,000 US.
So three to six months worth of expenses
could easily all go to debt repayment
depending on your debts.
With that in mind, it's important to remember the one
type of debt that you might want to consider paying down
before becoming really aggressive about your emergency
fund and doing something like a challenge.
And that is very high interest debt such as credit card debt.
Any debt that you have that is likely to accrue extremely
high interest on a rolling basis is
going to set back essentially every other financial goal
you might have.
However, debt with lower interest,
that is able to be paid over for a longer period of time
is going to be something you do not
want to prioritize if you don't have an emergency fund.
Obviously making minimum payments
and not going into default is going to be essential,
but you'd want to become aggressive about your emergency
fund before you become aggressive
about that lower interest debt.
Think things like subsidized student loans.
But once all of that is squared away
and you have organized what debts you
need to pay off before becoming aggressive about your emergency
fund, remember that three months should really
be considered a minimum.
Six months is better and 8 to 12 months of living expenses
should be considered a gold star goal.
And the amount that you save every month
should ideally be based on what you're taking in.
Some people do 10% of their gross pay,
some do 10% of their take home.
The latter will obviously take much longer
to save anything significant.
But in any case, no matter what you're saving
it should be automated.
This is the easiest way to make sure that you will actually
save it every month and you will stop
mentally factoring it into the money that you have to spend.
So you have started your saving process.
Now what?
The challenge comes in.
Let's say you've just opened an account
and are automatically depositing 10% of your take-home pay
into that account.
So let's say you're a person who makes $60,000 a year
and lives in a place like Illinois
with an income tax rate of 4.95%.
Your monthly take home would then be $3,700.
$370 per month would be going toward your emergency fund.
Now that's great but it will probably
still take more than 10 months to get to that sweet spot
of six months of expenses.
So what can you do to accelerate it?
First take a good look through your budget
and find if there are any things that you can temporarily
reduce in cost, eliminate altogether, or at least
temporarily pause while you're prioritizing the savings.
Now I'm not talking about giving up your daily cappuccino.
I assume many of you are already probably making
your coffee at home.
But things like subscriptions, could they
be combined with other people or given up for a while.
Are there any recurring payments that you didn't even
remember you were paying for, are you frequently finding
yourself spending on things like takeout,
restaurants, shopping, at least in ways
that you could be more mindful about them for a few months.
Challenging yourself to find an extra $100 or so
in your given monthly budget is a great way
to make sure that you are being proactive
about how you're saving this money,
rather than just doing it over the most prolonged
possible period of time.
And it's important to remember that there
are many items that you can cut down
on without cutting them out.
For example, alcohol spending.
If you go out to eat, chances are
you are often spending as much on a couple drinks
as you are on your actual entree.
A survey by Harris Poll found that millennials
spend an average of $300 per month on alcohol.
And if you cut that in half to 150 per month and sock
away even half of your emergency fund,
that's an extra $75 in their every month.
So hey, we're already up to $455 a month.
Third, if you have the availability
take up a low pressure side source of income.
These are things that you can take on
for just a few hours a week or even a few hours a month.
Think things like dog walking, house or babysitting,
selling some of your clothes on Etsy,
tutoring English or another skill you might have,
teaching at a local community center,
or even doing things that would be slightly higher commitment,
but higher rewards, such as picking up shifts for something
like a ride sharing service.
But just one modest side hustle like teaching
two-hour long fitness classes or tutoring one evening per week
could get you around $50 a week.
Add that to your e-fund on top of what's already going in
and we're up to $655 a month.
Fourth, find one spending habit or vise that you probably
indulge in a bit much and could do a month long abstinence
challenge to cut out, like bath and beauty
products or novelty foods.
Depending on what you choose to abstain from for the month,
you could save anywhere from 25 to more than $100.
Fifth and finally, refine and get creative.
Look at your budget line items like groceries or household
items and ask if there are ways to save
by doing things like switching stores or going generic.
Don't try to overhaul your budget totally,
just look for small savings opportunities
that are a little bit more creative than simply
cutting them down.
Even if it's just a small change something like the ibotta
or fetch apps that identify deals can help
you save around $30 a month.
So our fictitious hero is now saving around $740
per month for her e-fund.
And since we're starting this hypothetical challenge
in September, by the end of the year she would have $2,960.
In seven months, that's over 5,000
and that is before factoring in things like interest.
And yes, it did take a higher level of sacrifice, creativity,
and hustling than we normally recommend for your ongoing day
to day finances.
But it's important to remember that if you don't have
an emergency fund, you must treat
saving for one as an emergency.
The level of risk that you expose yourself
to if you don't have an emergency fund
is ridiculously high.
The kind of domino effect that one
unexpected uncomfortable expense can lead you to
is into potentially literally being
homeless, or without a way to get to your job,
or without enough food to eat, or drowning in medical debt.
Having a way to pay for unexpected expenses
is wearing a seat belt in life.
And as I'm sure as Financial Diet watchers
you are all very responsible.
You would never ride in a car without a seat belt.
So challenge yourself between now and the end of the year
to save your emergency fund or build
on what you already have in a way that will
take care of your future self.
And if you are looking for a great place
to store that emergency fund, click
the link in our description to open
a free account with SmartyPig and start saving.
As always, guys, thank you for watching.
And don't forget to come back every Monday, Tuesday,
and Thursday for new and awesome videos.
Goodbye.