Where to Start Your Personal Finance Journey

Personal Finance Series - Emergency Funds

TLDR: In summary, if you’re just starting your personal finance journey you need to:

• Start a zero-based budget

• Establish a first goal of a $1000 mini emergency fund

• Create an emergency budget and determine funds needed to cover 3-6 months, or 1 year

  • If you have a high debt value, direct efforts to debt freedom first

Why Have an Emergency Fund?

You may ask: which choice or choices best describes the purpose of an emergency fund? One of the most repeated pieces of advice we’ve come across regarding personal finance, and where to start, is to establish an emergency fund. The advice usually states a financial cushion should ideally cover 3-6 months of living expenses. Personally, we have found the most emotional comfort is to have a 1 year emergency fund. We’ve based this on the job market for our careers, the current state of the economy and the world, and the personal stresses active in our lives. An emergency fund acts as a safety net, protecting you from losing your job, providing you an opportunity to leave a toxic work environment, medical emergencies, or other financial surprises. That being said, most people still tell me to put away the crazy when I first advise them to set aside 3-6 months of living expenses. We get it, that’s a lot of money to think about if you’re just starting off understanding your finances. To kick things off, we urge you to try and get at least a $1000 emergency fund going. We call this the mini emergency fund, and it should be your first goal when starting your personal finances.

I want to note here, if you have a high amount of debt in your expenses, once you’ve established your $1000 mini emergency fund, we recommend for you to focus your efforts first on a debt repayment strategy vs. continuing onto a 3-6 month emergency budget savings plan. Check out Debt Repayment Strategy blog to figure out what works best for you to start that journey.

The next queston on your mind is probably how do I get started saving $1000 or even 3 months worth of my expenses?

Statistically, users of zero-based budgeting are 28% more likely to have an emergency fund in place compared to non-budgeters.

So a zero-based budget is a necessary starting point. You have to understand how your finances are being spent in order to identify where the savings will come to hit that first $1000, along with how much money you need in order to actually cover those 3-6 months emergency savings.

Zero Based Budgets - What are the major benefits of budgeting?

So what is a zero-based budget, and how is it different to alternative methods of budgetting? With alternative methods of budgetting, you’re reviewing what you’ve already spent that month. There’s no opportunity for adjustments throughout the month, and you don’t have a very good indication of what your spending habits are doing in real time. With a zero-based budget you get to actively direct every aspect of your income in order to track, understand, and get ahead of your spending. You should essentially know at any time in a month how every dollar you’ve earned is being spent or will be spent. We highly recommend the path of zero-based budgetting to see the full value of budgetting. You can start this with a notepad journal detailing your expenses, the envelope method (placing cash in an envelope for each bucket of expenses you have), or you can check out several apps that help you pull transactions directly from your bank in order to track all your spending.

While there are great apps out there, we would love for you to check out our app, Peaceful Mindful Pocket Coming Soon). We are the new “mom and pop” zero-based budget app and coaching services. We’re doing some things differently, like giving you a customizable budget template, the option to manage multiple budgets, and an easy transaction automation feature to speed through processing your transactions. Being a mom and pop shop in early stages gives us the ability to truly work with you on any new features, bugs, and guidance you need in your personal finance journey.

Once you’ve started your zero-based budget, you will break down your income and all of your expenses (Check out this article Establishing Your First Budget.)

When you’ve established what all of your necessary expenses are (i.e. home, electric, water, insurance) you’ve got the information you need to start setting aside for your $1000 mini emergency fund, along with a good starting point to understand/plan how much money you’ll need to cover a full 3-6 month emergency fund. The standard advice on calculating your emergency fund expenses has been: only cover everything in your four walls and work requirements: think needs not wants. We disagree, our big advice here is, while “fun money” such as eating out may be seen as “wants” and unnecessary expense buckets during an emergency, our experience of relying on our emergency budget for months during joblessness has shown us that it actually is absolutely necessary for our emotional states to have those reprieves/relief from stress.

The whole point and benefit of budgetting is to take advantage of the ability to plan and put yourself in the best position possible, even through an emergency. So, if you’re able to – plan for whatever is needed for your version of stress relief. Personally, while we did plan a reduced amount then our standard in those “unneeded” buckets, we did still include them as part of our planned expenses in our emergency budget. We also kept our maintenance buckets at a reduced amount (more on that below).

What Constitutes as Emergency?

There’s generally three questions you should ask yourself before spending money from your emergency fund. Is it unexpected, is it necessary, and is it urgent? What‘s the purpose of the three questions you should ask before using your emergency fund?

Mainly - we want to make sure that you save your emergency fund to cover you during things you truly cannot plan for: a sudden major illness, a sudden job loss or loss of hours, or an accident not covered by insurance to name a few. Does a popped tire hit emergency, what about the water heater going out? Personally we felt that no, it shouldn’t hit our emergency budget if we can plan for it. When it comes to break downs, our perspective is that we are looking at a “when” not “if” scenario. What we have done personally is create maintenance buckets – one for household and another for vehicles.

We’ve found that for our 2 older vehicles (an ‘08 Lexus RX400H and a ‘06 F350) a maintenance bucket of $250/month covers most of our “surprise” breakdowns, while also keeping up with more regular maintenance items like oil/filter changes. Similarly $250/month towards house maintenance covers most of what comes up, with a healthy growth trend for the eventual larger item repairs/replacements. This means when the A/C inevitably breaks in the middle of summer, we aren’t dipping into our emergency funds or at worst we are reducing the impact to it, as our home maintenance budget absorbs the bulk of the cost. Both of these budgets are set up as ongoing “funds” so each month the value keeps stacking for anything not used.

• I will note here, we are DIY’ers – so the values I mentioned work for us because it’s based on us often being the one’s doing the repair work. Adjust your own values based on your families priorities, needs, and capacity.

I mentioned above that we reduced the values of these buckets when considering our emergency budget (we dropped from $250 down to $100). We thought we’d built an “ok” nest that would still cover the little things that pop up. That was a mistake! Experience has shown us that Murphy’s law is alive and well: anything that can go wrong, will go wrong. For some reason, this becomes particularly true when you’re on survival mode, so our advice is just keep your standard expense in your emergency plan.

The next thing we’ve found is the constant need to upgrade things, particularly around the house. These are items like replacing your kitchen sink, installing a bidet, getting a higher pressure shower head, upgrading your phone, getting a second vacuum for upstairs. These are not items that should hit an emergency fund, (though sometimes the life improvement gain feels like an urgent emergency), and nor are they broken/in need of repair. For these situations we created a “Home Improvement” bucket. We’ve personally set $100/month for this, and we’ve found that it does well to cover small improvements. In the end, we left this bucket out of our emergency budget – while it would be nice to have, it’s an emotionally manageable item for us personally to go without. I wanted to mention it as an idea for a stress relief valve you/your family may feel you need to plan for in the case of emergency job loss situation – sometmes the ability to still progress in one aspect of life relieves the stress/tension on other areas. So while this bucket item didn’t make our emergency plans, maybe it make’s yours. We recommend having 1-2 buckets that provide you a stress relief valve during hard times.

We hope this blog has provided you value and something to get started on! If you would like to connect with me for a free consultation to see how I can help, book some time with me here on Calendly.

If you like what we’re doing here and would like to try our budget app, check it out PeacefulMindfulPocket.