Own the Game (but first start by making sure you have an emergency fund)

Building your emergency fund is probably the most boring aspect of all the boring things you will need to do to get your financial life in order. And, as is often the case, it’s also one of the most important.

There isn’t any flash to it. It’s not going make you wealthy. And it’s not going make you an Instagram star. But it will help you pay your student loans in case you lose your job – or as is more likely the case, mom stops sending money.

If you are just getting started with learning about money, you are starting in the right place – an emergency fund. If you already do some investing or have a 401k you manage but don’t have an emergency fund, then you should stop what you are doing and start an emergency fund right away. Seriously, you need to start an emergency fund now.

Investing wisely is important and so is saving money on your car insurance. But none of that matters if you can’t pay your bills; that is how you end up going back home to live with your folks, which we can all agree is not ideal.

So you probably have some questions now.

What is an emergency fund?

An emergency fund is cash you set aside for emergencies. Next question.

What counts as an emergency?

Emergency = Lose your job, car breaks down, death in the family

Emergency ≠ car needs gas, friends are going on a road trip, guy I met at the mall wants me to invest in his company

How much should I save in my emergency fund?

You want to ask yourself the question, ‘if I lost my job today how many months of living expenses do I need/want?’ Most experts agree you want between three and six months of living expenses saved in an emergency fund.

So now the next question is, should I save three or six or somewhere in between?

To decide on exactly how many months of living expenses you will need to consider a few other things. Do you have other types of liquid or semi-liquid investments that you can access in case of an emergency like job loss? This would be something like a money market or brokerage account with cash or stock, mutual funds or index funds that you could sell over the course of a few months and use for your living expenses. Note, this does not replace an emergency fund, but more like an extension of it.

Another consideration is what the job market is like in your area and your line of work. If you are a lawyer and there are lots of other lawyers in your city, but not that many jobs for lawyers then you may want to try to save closer to six months.

On the other hand, if you are a coder living in San Francisco and you know that there is always a lot of demand for coders, then you may want to go to hell. Seriously, stop throwing it in our faces, we get it, all coders are members of a superior race.

How do I figure out what my living expenses are?

Good question. Your living expenses are everything you are spending money on each month or each week that you need to live your life. Examples: car payment, health insurance, food. Stuff like Starbucks, seeing the latest Fast and the Furious movie in the theaters and drinking PBR tall cans don’t really count. If you have lost your job, you should stop buying so much beer.

If you are looking for a simple excel template to track your monthly budget you can find one here.

Where should I keep my emergency savings?

The answer is in a separate checking or savings account that you can get to quickly in the event you lose your job. You should also keep your emergency savings in a separate account from your other savings and investments. Make sure there are no fees or penalties for you to pull money out. And if you are like me and have little to no willpower then you should keep your emergency fund at a different bank than your regular checking so you don’t get tempted to transfer money every time you go to watch the ponies run.

Also, these days interest rates on savings accounts are pretty miserable, so, if you have some time, shop around at a few credit unions and online banks that will give you slightly higher than peanuts for your (parents) hard-earned money.

Three to six months seems like a lot of money, how do I save that much?

Fair point, it is pretty daunting especially if you are starting from $0. But it’s pretty easy to start with $50 or $100 each month. Look at your current budget and your expenses over the last several months and look for things you can cut back on or cut out. Make some sacrifices and set up your monthly savings to automatically be transferred from your checking to your savings. Think about putting part or all of your tax return into your emergency fund.