The First Step to Not Being Controlled By Money

A survey found that 63% of people have been living paycheck-to-paycheck since the pandemic. When living paycheck-to-paycheck, so many aspects of your life are controlled by money. This is further exaggerated by not having any emergency savings. Only 39% of people could cover an unexpected $1,000 expense.

This means the majority of people are having to rely on credit cards, delay car repairs, and maybe even forego medical care. And, of course, if you’re living paycheck-to-paycheck, you’re more likely to be stuck in a job that you’re not happy with.

How can we step out of this cycle and take control?

Financial Liberty is all about not being controlled by money, but the overall approach may vary depending on your own goals and your current situation. However, there is one thing that applies to everyone that is a huge first step towards no longer being controlled by money… an emergency fund.

Why is this so critical?

  • Lose your job? You have time to find another one.
  • Car breaks down? You can get it fixed.
  • Unexpected medical expenses? You got yourself covered.

And, more importantly, you can handle these situations without taking out loans, liquidating long-term investments, or otherwise jeopardizing your financial future. This stability makes a major contribution to you being able to live with Financial Liberty and stop being controlled by money.

Photo by Sam Xu on Unsplash

How Much You Need in Your Emergency Fund

A generally accepted rule-of-thumb is to have an emergency fund that could cover 6 months of living expenses. If you’re looking for the simplest approach, just go look at your spending from last month and multiply it by 6. This is how much you want in your emergency fund. 

This may vary to some degree depending on your personal circumstances. Here are some examples that may influence how much you need to have in your emergency fund:

  • If you have some sort of benefit, such as VA benefits, Social Security, a pension, etc. then you may not need to have as much in your emergency fund because you will have some income even if you’re not working (but be careful because nothing is guaranteed forever).
  • If you’re married and you and your spouse are both working, then there’s some additional security from the second income and you may not need as large of an emergency fund. At the same time, you never know when, like, I don’t know, a pandemic shuts down the whole world and you and your spouse could both lose your job.
  • If you have an HSA (Health Savings Account) for medical expenses, you could use this to cover medical expenses without having to dip into your emergency fund.
  • If a lot of your spending is optional, i.e. things that could be cut in case of an emergency, you may not need to include these in your calculation of 6 months of living expenses.

Personally, my wife and I set aside 9 months of living expenses (including optional expenses). We’re both on the more cautious side and appreciate the extra security. I highly recommend 6 months or more.

How to Build Your Emergency Fund

6 months of living expenses is a lot of money. How do you save up that much? With 2 simple steps:

  1. Start with a mini emergency fund of $1,000
  2. Set up a monthly contribution to build the rest

You want to start with getting a $1,000 mini emergency fund as quickly as possible because your plans could get derailed if you have to cover an emergency with a loan or credit card. This $1,000 is a cushion for unexpected circumstances to help you stay on track with building your larger emergency fund, and you should set it up right away.

Here are some ideas for how to quickly save up $1,000:

  • Have a yard sale
  • Sell a vehicle and bike, walk, or take public transportation (also healthy and good for the environment!)
  • Eat beans, rice, and vegetables for a month and save 90% of your grocery bill
  • Quit dining out
  • Donate plasma
  • Take extra shifts at work

Once you have your mini emergency fund set up as a cushion, come up with a plan to make regular contributions to your emergency fund until it is fully funded. 

Here’s an example. If your average expenses are $3,500 per month then 6 months would be $21,000. You set up your $1,000 mini emergency fund, so you need to save $20,000 more. That would be:

  • $500 per month for 40 months (3 years, 4 months)
  • $800 per month for 25 months (2 years, 1 month)
  • $1,666.67 per month for 12 months

The faster you can build it up the better; contribute as much as you can. Once it’s set up, then you can stop worrying about it and also have the peace of mind that comes with this security. If the most you can afford means it will still take you 4 years to fully fund your emergency fund, that’s totally okay. Start with whatever you can. It will grow, and all the while you have at least some protection from emergencies.

Where to Keep Your Emergency Fund

The $21,000 in our example above is a lot of money, so I would not at all recommend stuffing it under your mattress. It needs to be kept somewhere safe that is quickly accessible for you in case of an emergency. 

Personally, I use my savings account. It’s at the same bank where I have my checking account, so I can move it into my checking immediately with an app and spend it from my debit card whenever I need it. It also pays 1.5% interest, so that’s helping it not lose value to inflation. (It actually paid 4% before the Fed slashed its rate during the pandemic! *sigh* I miss those days.)

Another good option is a money market account. It is not recommended to invest the money in your emergency fund in anything risky or illiquid. It’s best to keep it in cash in an interest-bearing account. If you think you’ll be tempted to spend your fat stacks, a money market account might be a better option than something directly connected to your checking account or an easy source of spending.

Spending Your Emergency Fund

So when can you spend your emergency fund? What counts as an emergency?

I always ask myself, “Can I get by without this?”

For example, if your car breaks down and that’s your only way to get to work, that counts as an emergency. Get it fixed.

If your waffle maker breaks, you can get by with toast until you get the money from elsewhere to replace your waffle maker. (Yes, I do know someone who used their emergency fund to replace their waffle maker.) That is NOT an emergency!

If you don’t have an emergency fund set up yet, start now!

Having an emergency fund is a critical part of living with Financial Liberty. The security it provides you enables you to start living a life where you don’t have to be controlled by money.

Questions about emergency funds? Let me know in the comments!


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