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Duration:10:50
Uploaded:2021-08-31
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In this video, Chelsea explains The Emergency Fund Challenge, outlining how someone could set to save $3,000 towards an emergency fund by the end of this year. Share your own emergency fund challenge on social media, and be sure to tag us in your progress!

This video is sponsored by SmartyPig. Click here to open a SmartyPig account for free and start saving for what matters to you: https://www.smartypig.com/?dtd_cell=RDCSSMDCZPAFOTOTOTHOTHRN010003

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MarketWatch data: https://www.marketwatch.com/story/nearly-25-of-americans-have-no-emergency-savings-and-lost-income-due-to-coronavirus-is-piling-on-even-more-debt-2020-06-03

Average debt: https://www.businessinsider.com/personal-finance/average-american-debt
https://www.moneysense.ca/save/budgeting/what-is-an-emergency-fund-and-how-to-build-one/

Paycheck calculator: https://smartasset.com/taxes/illinois-paycheck-calculator

Alcohol spending survey: https://www.usatoday.com/story/money/2020/01/08/dry-january-could-save-millennials-more-money-than-they-think/2831655001/

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Hey, guys.

It's Chelsea from The Financial Diet. And this week's video is sponsored by SmartyPig.

And if you have not already, please do not forget to click the Subscribe and the Join buttons to join our super secret society, and support us. We're doing great work, in my opinion get on board. And today we are going to be talking about one of the most fundamental elements of building your own personal finances and that is building your emergency fund.

Because we often say to people that you really can't do anything financially until you've got an emergency fund, it's important that we address this regularly on the channel as a way to get people started on their best financial foot. And we think that one of the easiest and most effective ways to save up that initial savings buffer, which can often be difficult with other conflicting goals and bills is to set a dedicated emergency fund challenge. But first, what is an emergency fund?

Well, an emergency fund is exactly what it sounds like. It is a sum of money that you've saved to cover unexpected and sudden financial strains that go beyond your typical day to day expenses. Sounds useful, right?

Except not everyone has one. According to MarketWatch around 25% of Americans don't have emergency savings. CNBC'S estimates are even harsher, that only 39% of Americans could afford a $1,000 emergency.

These stats aren't the result of laziness or lack of ambition, they're the result of decades of income inequality. Still as 2020 proved, you need to have a plan. And the best time to start putting money into an emergency fund is three years ago.

The second best time is now. So that is why now is the time to challenge yourself to either start or improve your emergency fund. So we're launching the emergency fund challenge, asking our viewers to either establish or improve on their emergency funds according to their own budgets.

And for this video, we're going to be using an example of how someone could save $3,000 by the end of this challenge. And before we dive in, when you do save your emergency fund, it should be completely separate from the checking account that you use on a daily basis. A high yield online savings account is a great option.

And with the SmartyPig app, you can take your goal setting journey one step further. SmartyPig makes sticking to your savings goals including reaching your emergency fund simple and painless. SmartyPig is a totally free FDIC insured savings account that makes saving easy and rewarding.

Their goal planning system not only helps you map out short term goals, like your emergency fund, but also long term savings goals like a trip to Italy or a car down payment. SmartyPig was designed to put you in control of your own goal planning and financial independence by helping you adapt to a save then spend mentality then be rewarded for sticking with. It you can set up whatever goals you like and then fund them with scheduled recurring contributions from your existing checking or savings account, letting you save without thinking about it.

And SmartyPig helps you stay on track with a goal planner, helpful reminders, competitive interest rates, referral bonuses, and more. So click the link in our description to open a SmartyPig account for free and start saving for what matters to you. Now let's understand what emergency funds should and shouldn't be used for.

This money should not be used for things like financing long term goals, like planning a trip, or buying a car, or doing something proactive and ultimately optional with your money. If you find yourself dipping into your emergency fund to help finance some of those goals, you probably need to rethink how much you are actually saving for them. But when it comes to the actual emergencies that this fund should be used for, everyone is going to have different types of emergencies.

For example, not everyone owns a home or a vehicle, so unexpected repairs on those things are not going to factor in. But perhaps you rely on a lot of tech equipment for your job. So needing to repair or replace those items on short notice could be considered an emergency worth tapping into the fund for.

But by far the most common things that emergency funds should be used for are things like medical expenses that are not covered by insurance or a sudden loss of income. Now that last one happened for many, many people across the country and the world last year, which not only forced the question for many people of do I have an emergency fund. But Additionally is what I have in my emergency fund enough?

So what is enough? Traditionally experts have said that you should have three to six months of expenses in your emergency fund or some have said three months of your net income. But there is one problem with this though.

The average American debt is just over $52,000 and the average Canadian debt is just a little higher at $72,000 Canadian which is about $57,000 US. So three to six months worth of expenses could easily all go to debt repayment depending on your debts. With that in mind, it's important to remember the one type of debt that you might want to consider paying down before becoming really aggressive about your emergency fund and doing something like a challenge.

And that is very high interest debt such as credit card debt. Any debt that you have that is likely to accrue extremely high interest on a rolling basis is going to set back essentially every other financial goal you might have. However, debt with lower interest, that is able to be paid over for a longer period of time is going to be something you do not want to prioritize if you don't have an emergency fund.

Obviously making minimum payments and not going into default is going to be essential, but you'd want to become aggressive about your emergency fund before you become aggressive about that lower interest debt. Think things like subsidized student loans. But once all of that is squared away and you have organized what debts you need to pay off before becoming aggressive about your emergency fund, remember that three months should really be considered a minimum.

Six months is better and 8 to 12 months of living expenses should be considered a gold star goal. And the amount that you save every month should ideally be based on what you're taking in. Some people do 10% of their gross pay, some do 10% of their take home.

The latter will obviously take much longer to save anything significant. But in any case, no matter what you're saving it should be automated. This is the easiest way to make sure that you will actually save it every month and you will stop mentally factoring it into the money that you have to spend.

So you have started your saving process. Now what? The challenge comes in.

Let's say you've just opened an account and are automatically depositing 10% of your take-home pay into that account. So let's say you're a person who makes $60,000 a year and lives in a place like Illinois with an income tax rate of 4.95%. Your monthly take home would then be $3,700. $370 per month would be going toward your emergency fund.

Now that's great but it will probably still take more than 10 months to get to that sweet spot of six months of expenses. So what can you do to accelerate it? First take a good look through your budget and find if there are any things that you can temporarily reduce in cost, eliminate altogether, or at least temporarily pause while you're prioritizing the savings.

Now I'm not talking about giving up your daily cappuccino. I assume many of you are already probably making your coffee at home. But things like subscriptions, could they be combined with other people or given up for a while.

Are there any recurring payments that you didn't even remember you were paying for, are you frequently finding yourself spending on things like takeout, restaurants, shopping, at least in ways that you could be more mindful about them for a few months. Challenging yourself to find an extra $100 or so in your given monthly budget is a great way to make sure that you are being proactive about how you're saving this money, rather than just doing it over the most prolonged possible period of time. And it's important to remember that there are many items that you can cut down on without cutting them out.

For example, alcohol spending. If you go out to eat, chances are you are often spending as much on a couple drinks as you are on your actual entree. A survey by Harris Poll found that millennials spend an average of $300 per month on alcohol.

And if you cut that in half to 150 per month and sock away even half of your emergency fund, that's an extra $75 in their every month. So hey, we're already up to $455 a month. Third, if you have the availability take up a low pressure side source of income.

These are things that you can take on for just a few hours a week or even a few hours a month. Think things like dog walking, house or babysitting, selling some of your clothes on Etsy, tutoring English or another skill you might have, teaching at a local community center, or even doing things that would be slightly higher commitment, but higher rewards, such as picking up shifts for something like a ride sharing service. But just one modest side hustle like teaching two-hour long fitness classes or tutoring one evening per week could get you around $50 a week.

Add that to your e-fund on top of what's already going in and we're up to $655 a month. Fourth, find one spending habit or vise that you probably indulge in a bit much and could do a month long abstinence challenge to cut out, like bath and beauty products or novelty foods. Depending on what you choose to abstain from for the month, you could save anywhere from 25 to more than $100.

Fifth and finally, refine and get creative. Look at your budget line items like groceries or household items and ask if there are ways to save by doing things like switching stores or going generic. Don't try to overhaul your budget totally, just look for small savings opportunities that are a little bit more creative than simply cutting them down.

Even if it's just a small change something like the ibotta or fetch apps that identify deals can help you save around $30 a month. So our fictitious hero is now saving around $740 per month for her e-fund. And since we're starting this hypothetical challenge in September, by the end of the year she would have $2,960.

In seven months, that's over 5,000 and that is before factoring in things like interest. And yes, it did take a higher level of sacrifice, creativity, and hustling than we normally recommend for your ongoing day to day finances. But it's important to remember that if you don't have an emergency fund, you must treat saving for one as an emergency.

The level of risk that you expose yourself to if you don't have an emergency fund is ridiculously high. The kind of domino effect that one unexpected uncomfortable expense can lead you to is into potentially literally being homeless, or without a way to get to your job, or without enough food to eat, or drowning in medical debt. Having a way to pay for unexpected expenses is wearing a seat belt in life.

And as I'm sure as Financial Diet watchers you are all very responsible. You would never ride in a car without a seat belt. So challenge yourself between now and the end of the year to save your emergency fund or build on what you already have in a way that will take care of your future self.

And if you are looking for a great place to store that emergency fund, click the link in our description to open a free account with SmartyPig and start saving. As always, guys, thank you for watching. And don't forget to come back every Monday, Tuesday, and Thursday for new and awesome videos.

Goodbye.