The Buckscoop Bargain Blog is predominantly focused on helping our followers save money and become savvier about where they spend their money. However, one thing I feel that there isn't enough discussion around is building an emergency fund that you can depend on during tough times. This is particularly important when you consider the turbulent financial times within which we now live.
I would suggest that should keep between 3 to 6 months of income saved up, which I'm sure for quite a few of you can sound rather daunting. However, should the need ever arise where you're required to live off this fund for a while, you'll certainly be glad you'd put away as much money as possible. Simply having these funds sitting in an account isn't enough though. It's very important to run a sort of 'fire drill' where you pretend that you've lost your income stream and need to test whether the fund will actually be able to support you as intended or not. You'd be surprised at what challenges or complications a drill like this can expose, so keep reading to find out how best to go about running your own test.
One of the best ways to perform a fire drill with your savings budget is to perform what I call a ‘Fire Drill Month.’ What this requires from you is to prevent yourself from spending any of your monthly income. Instead you should dip into your emergency fund to replicate the scenario of say, losing your job for example. This is a great test to see how your emergency fund would cope over the course of a month based on your current expenditure and overheads, but you must be strict and disallow yourself from touching your monthly income.
Doing this will mean that you accomplish two key things:
1) You will learn how it feels to deal with the stresses associated with thinking you only have a limited amount of money left. It will teach you how to live on less. You will feel the restrictions around dining out or buying that morning coffee and hopefully understand what is required of you when you have to spend less.
2) This practice should also boost your savings for the month, because in theory you should be spending less and therefore have more left over from your monthly income. Although technically you are pulling money from your emergency fund, at the end of the month you must replace any expenditure with your monthly income.
This is all easily said, but how do you actually put this into practice and not spend your monthly income? Firstly, everyone’s saving setup is going to be different. Some people may have savings accounts within the same bank while others may not, so transferring money between them can be a real hassle - especially if you have specific non taxable amounts, but that’s exactly the point. When and if an emergency arises, transferring money will be a hassle and you may be caught completely off guard when it happens. That’s why I believe it’s crucial that you go through every single step thoroughly to really ensure you’re ready if 'that day' should ever rear its ugly head.
Once you’ve moved your money around, act as you would if you were only living off your emergency fund. Yes, you will probably make mistakes, you may overspend every now and again or even be hit with an unexpected large expense. In these scenarios you need to stick to your guns wherever possible and continue dipping into your savings otherwise the practice becomes pointless. At the end of the day though you are not obliged to, however it’s important to mention that it is these exact scenarios, these unexpected financial occurrences that make your fire drill month so important. It teaches you how to better prepare yourself in the event, plus it can teach you the real value of your job and the hard work you put into earning your money.
After the month is over you also need to assess the situation, looking at things like what expenses arose that you didn’t expect? What mistakes did you make? Where could you reduce your spending to make your money go further? What did you learn about yourself in this situation and where did your priorities lie? If performed correctly the experience should teach you how to better understand your financial situation in a crisis. Plus you will come away with a bigger chunk of cash from your monthly income because you became a hard-core super saver for a month!