How to get started saving an emergency fund

“You promised you would never go broke but here you are, $200 in your bank account and unemployed.” I thought this to myself as I laid on my mattress on the floor of my crummy, shared, one-bedroom studio apartment. Angry at myself, disappointed in myself, afraid of running out of money and afraid no one would hire me, I was a mess.

The only real jobs I had had were jobs back home in Anaconda, jobs from people that my family knew. I had spent the first part of that summer in Missoula trying to sell knives. I had found a flyer on the windshield of my car on the last day of school offering training which then you could use to sell knives on commission. I was a horrible knife salesperson (I mean I never stabbed anyone…but I definitely didn’t make any money). Having to make cold calls, going to people’s houses, basically an introvert’s nightmare. But the alternative was even scarier.

I felt hopeless about getting a regular job since I didn’t know anyone there.  “It’s not what you know but who you know” I would remind myself that no one would even hire me if I applied, so what’s the point in trying? Plus, there was anxiety around having to go to a new place I haven’t been and meet a whole crew of people I’ve never met. That’s how I found myself unemployed and horizontal for this pity party for one.

This was my tipping point or “Never again” point. I knew that it was at the time too. It was time for action. Wanting something and being willing to take any action necessary to make sure something happens are two different things and this was the moment I crossed that line.

Here are the 5 steps I went through to get from $200 to full $10,000 emergency fund that I’ve had ever since.

1. Raise your standards.
2. Adopt the mindset that you are saving money that you plan to never spend.
3. Build a life with breathing room between income and expenses.
4. Go into full “no spend” emergency savings mode.
5. Start with a small emergency fund and then grow it bigger over time.

Raise your standards

The very first thing I did after seeing that $200 bank balance (after freaking out of course) was identifying that this is not “Okay”.  This isn’t the life I want to live, and it CAN’T happen again.

Can you change your standards? I don’t think that everyone realizes that they are in control of their own standards. You likely established your standards subconsciously a long time ago. They might even mirror the standards that your parents had for themselves. I believe that you can change your standards at any time because they aren’t set in stone.

Define your new standards.

What’s the new bare minimum you are willing to accept for your life?

This isn’t setting a goal of how much you WANT to have in your emergency fund, this is defining what you MUST have. It seems like a small difference, but it makes all the difference. I decided; “Never again will I have less than $1000.” And I meant it and I have kept that promise to myself for the last 14 years.

Adopt the mindset that you are saving money that you will never spend.

I’m going to write posts soon about different types of emergency funds but I think the first one you should have is a “death fund”. The purpose of the “death fund” is to either be the final dollars that I spend on food to prevent my own starvation or money for my end of life care/funeral costs so that my family doesn’t have to be burdened financially. I also call it “death” money because essentially, that $1000 was “dead to me”. It’s money that I planned to just have and NEVER spend.

Not everyone agrees that you should have money that you plan to never spend. When people tell me that they want to spend every cent they make and die with $0, I just can’t relate. I’ve been near $0, it’s not great, I’d give it 0 out of 10 stars. I want to be as far from $0 as possible for the rest of my life. If each of us knew the day we would die, I’d understand their goal a little better but we don’t. Why risk running out of money at any age?

If you desire to spend all the money you make, then what incentive do you have to save any money? By that logic, you could find yourself always being one emergency away from being broke.

I didn’t realize it at the time, but the ability to ignore the money I save is a skill that has absolutely helped me build wealth beyond just emergency funds. Over time, having this fund helped me build the financial discipline required to improve my finances, once and for all.

Build a life with breathing room between income and expenses.

I know you’ve heard it a thousand times but that means increasing income and decreasing expenses. I was lucky because at the time I was broke, a girlfriend and I shared an apartment that cost $425 per month which included all utilities but water (so I paid about $230 each month for living expenses). Looking back, if I was paying $600 per month for a separate private bedroom like some of my friends, I would have had to struggle so much harder for so much longer to build my emergency fund.

The decisions you make matter. Focus on cutting expenses for the big 3; housing, transportation and food. Increasing the amount of money you can save every month will not only allow you to build your emergency fund but will also help you pay extra towards debt or invest money for retirement and other goals. It is the answer to all our financial problems.

Go into full “no spend” emergency savings mode.

I got specific with myself about what I could and couldn’t do from the time I had $200 to the time I hit my $1000 goal. I couldn’t get haircuts, spend money on entertainment or recreation. I could only drive my car if someone I loved had died, which meant I had to walk to work and skip Thanksgiving with my family. I decided I would only eat the bare minimum cheapest foods like bananas, vegetable soups, baked potatoes, and rice with butter.

Caution: Cutting spending drastically can lead to yo-yo spending or binge spending. I recommend doing short sprints of “emergency savings mode” with breaks in between for you to catch your breath and not feel too deprived. Also, you can define for yourself how extreme your “emergency savings mode” is.

Start small and then grow it bigger over time.

I started with the $1000 emergency fund and then quickly realized I needed to have more than $1000 in my checking account if I always wanted to have $1000. After the $1000, I set a new standard to always have $2000. After $2000 was saved, I set a new standard of $3000. I increased my emergency fund $1000 at a time until I hit $10,000. After living for a couple years with a $10,000 emergency fund, I realized that it is pretty unlikely that I would need more than that for common emergencies. It provided the peace of mind that I sought my whole life. I can’t recommend the $10,000 emergency fund enough.

Now you may find as you build up funds that you don’t need $10,000 to cover your most likely emergencies or to feel secure. I should mention that during most of this time I didn’t have health insurance, so I probably did need more cash because of that. I also didn’t own a house at that time or have kids or other dependents so you may find you need more than $10,000. Whatever result you are after, start with a reasonable and realistic number so that you can achieve it and then have momentum to keep going. Don’t expect yourself to build a $50,000 emergency fund from $0. That is a recipe for disappointment.

In Conclusion

Well this post got a bit serious didn’t it? The topic of emergency funds is one that I feel passionate about because I know people are running around out in this harsh world unprotected.

Emergency funds are the best antidote for financial stress.

For Discussion:

Have you experienced a “never again” moment in your finances?

What tips do you have for people just beginning to save an emergency fund?