Do you currently have a savings account? How much is in there? If a big expense suddenly came up, would you be reaching for your bank card or your credit card?
In other words, do you have enough in the bank to cover an emergency, or do you automatically charge these expenses to your credit card and focus on paying them off later? Everyone talks about having an emergency fund, but how much should you really have in there?
The Emergency Fund
Just a few years ago, many advisors suggested that you have 3-6 months worth of expenses in savings. So, in the event that something catastrophic happened like a job loss, you would have 3 to 6 months to find another job and get back on your feet. Well, that may have been okay back in 2006, but today, that’s just not going to cut it. The economy is quite different today and jobs are not that easy to come by.
While the unemployment percentage does keep going down, there are still many more applicants than there are jobs. With the increased demand for each position, the interviewing process is taking longer as well. You might find a perfect job that you’re confident you will get, but sometimes it takes more than three months to even be offered the job! If you only had 3 months worth of expenses in your emergency fund, you’d already be surviving on your credit card.
Since the economy slipped in 2008 (and still seems a bit rocky today), it is now advised that you have 6 to 12 months worth of expenses in your emergency fund. That means that if you typically spend $30,000 each year, then you should have between $15,000 and $30,000 set aside in a savings account that can be accessed fully in less than 24 hours.
That may seem like a lot of money, but would you rather have the proper amount of money set aside or ring up $15,000 on your credit card? I hope you see my point.
The Emergency Fund Alternative
Okay, so I tried to sell you on the massive emergency fund, but for those of you that think I’m just out of my gourd, here’s an alternative option: Create an unused income source. Think about it.
What if you had an extra $1,500 coming in that you just didn’t use and wasn’t dependent on your full time job?
If you did happen to get the boot from work, you could tighten up your expenses and potentially survive for six months without whipping out any of those credit cards.
So how do you do it? Great question. Initially, it might seem difficult to earn an additional grand each month, but if you rack your brain for a couple of weeks, I bet you could come up with something. Most of the flexible opportunities are online these days.
You could start your own blog, you could sell products with an online store, you could even write articles for well-known sites. If you’re an expert in a certain topic, perhaps you could even write a book and earn money with the royalties. If you’re good with your hands, refinish old furniture for the modern (yet old) look. You could start your own lawn mowing service. The possibilities are endless!