Written by Sarah E.J. Collier, J.D.
You saved, saved and then saved some more to establish your emergency fund. Saving the 3-6 months’ worth of expenses to establish your emergency fund was no easy task. However, you just went through a financial emergency and drained your emergency fund. While this can make you feel defeated, just remember “Rome was not built in a day.” Following these simple steps will help put you back on track in reestablishing your emergency fund.
Before you start saving, you need to know what you can save from your paycheck. To do this, you need to look at your expenses, any financial planning considerations, and budget in self-care expenses.
Analyze your expenses to establish a baseline budget
The first step to any emergency plan saving strategy is to analyze your expenses. These expenses should include fixed and variable necessities. i.e no monthly FabFitFun or ipsy subscriptions. Necessity fixed expenses are those bills that you must pay such as loan payments, cell phone bill and car insurance. Variable necessities include expenses such as transportation (fuel, public transportation, etc.), certain utilities and groceries. Depending on the emergency you just weathered, you may see a change in your expenses when compared prior to the emergency. For example, if you totaled your car and needed to buy a new car, you may now have monthly payments that need to be figured into your expenses.
Hypothetical Scenario:
Fixed Monthly Necessity Expenses
Rent………………………………………………………………………………………….. $ 850
Utilities-Cable & Internet……………..…………………………………………….. $ 85
Renter’s Insurance……………………………………………………………………… $ 14
Car Insurance………………………………………………………………………….…. $ 150
Car Payment ………………………………………………………………………..……. $ 345
Cell Phone……………………………………………………………………….………… $ 50
Credit Card Payment……………………………………………………………..…… $ 30
TOTAL……………………………………………………………………………………… $1,524
Variable Monthly Necessity Expenses
Fuel/Transportation………………………………………………………..…………. $140
Groceries………………………………………………………………………….……….. $ 300
Utilities-Heat& Electric………………………..…………………………………….. $ 120
TOTAL:………………………………………………………..……………………………. $560
Grand Total Expenses:………………………………………………..………………..$ 2,084
Do you have other financial planning strategies to consider?
Many of us have debt or other savings in place that we are trying to achieve based on our financial goals and objectives. For example, you may have outstanding credit card debt or student loans that you are paying more on to accelerate the payment plan. If these financial plans impact your financial health, take this spending into consideration as well.
Hypothetical Scenario:
Financial Planning Strategies
Savings Plan………………………………………………………………………………. $ 300
Credit Card Payoff……………………………………………………………………… $ 100
Total:…………………………………………………………………………………………. $ 400
Total Expenses Plus Financial Planning Strategies:……………………………………………………………………. $2,484
What is your expenses to income ratio?
After analyzing and adding up your expenses and financial plan considerations, the next step is to compare that total to your income to determine your income to expenses ratio. To do this, you need to take your after tax income, including any benefits that are taken straight out of your paycheck, and subtract your total expenses. This is the amount you have left over to incorporate into your emergency fund saving strategy.
Hypothetical Scenario:
Monthly Income after tax & Employer Benefits (i.e. Monthly Take Home)…………. $ 3,500
(Monthly Take Home) – (Total Expenses plus Financial Strategies) = remaining monthly funds
($ 3,500) – ($ 2,484) = $ 1,016
Budgeting the “Want” Expenses
We all like the luxury of going out with our friends on the weekend or get excited to receive our monthly subscriptions. While self-care is still very much important for your health and wellbeing, it is important to be mindful of how much you are spending a month on these type of activities. If you are someone who enjoys going out for coffee or wing night, try to create a budget that is modest, but allows you to enjoy yourself at least once or twice a week. Based on the example provided, it may be modest to allocate $200 a month, $ 50 a week, towards these self-care expenses. This then leaves $ 816 to save towards saving for your emergency fund.
Final Calculation
Once you have figured out how much of your monthly income is remaining, next determine how long it will take to reach your emergency fund goal. To calculate your fund’s goal determine how many months’ worth of expenses you would like to save for. Variables as to whether you save for more than 3 months include: whether you own other liquid assets; whether there is a high probability that you may be faced with another emergency; how stable your source of income is; etc. Next, total monthly expenses (fixed and variable).
Assuming you will be savings 3 months of expenses, this example’s emergency fund goal is $ 6,252. If you are able to save $ 816 a month, you will reach your fund goal in about 7.5 months. Of course, if you need to establish an emergency fund sooner, you can always adjust the numbers accordingly, just make sure you do not cut necessary expenses.
For more information on saving, check out our other blog written by Andrew Baron, CFP® “Beyond the Numbers: Building a Realistic Saving Plan.”
Happy Saving!
