I went through the Financial Peace Flex online course on my own a few months ago, and this week I’m reviewing the third session.
Session three is about building an emergency fund that will cover 3 to 6 months of your expenses.
Never Going Back!
Once you’ve paid off all your debt except your mortgage (baby step 2), the next step is to build a fully funded emergency fund. “Fully funded” means it would be able to cover 3 to 6 months of expenses.
The spenders who suffered through the discipline required to pay off debt may want to slow down at this point. But it’s critical that you keep moving forward with the same gazelle intensity as you move into step 3.
Because in order to not slide backward, you must have a nice cushion of savings that will protect you when emergencies arise.
Yes, you can celebrate when you can finally say “I’m debt free!” – but don’t stop there. If you do, Murphy’s Law will kick in, you’ll be charging that next emergency and be right back in debt. Let the fear of that possibility motivate you!
Commit to never going back! Keep moving forward and start saving with the same intensity you had with crushing your debt.
Changing Your Mindset
Did you know that 8 out of 10 Americans live paycheck to paycheck? (I am one of those 8!)
Our culture has convinced us that it’s normal and acceptable to live on the brink of financial ruin. You might be one paycheck away from a major disaster. That’s scary!
Then, when an emergency happens, the only option is to go into debt. It’s a crazy cycle that keeps us from building wealth.
It doesn’t make sense to keep doing the same thing and expect a different result. A change in behavior is necessary, and that starts with our thinking.
Having a little self-awareness is helpful. Why do you think you’re stuck in the debt cycle? What causes you to keep using credit cards? How did you get in this situation?
I’ve thought about these questions a lot over the past year. It can be tough to break down habitual behavior when it’s second nature. But it’s *really* important to figure it out if you want to change.
In the video, Rachel Cruze (Dave’s daughter) talks about the struggle with comparison. Ten years ago you had to go outside your front door to actually see what you’re up against. These days, you just have to go on Facebook.
Social media really knows how to bring out the insecurities in all of us.
Unfortunately, trying to keep up with the Joneses can really suck the joy out of life. Not only that, it can suck the money out of our wallets, too!
When I was younger I really struggled with this. I lived in southern California where everyone is perfect, and it’s expensive to keep up with perfect.
As I’ve gotten older, I’ve gotten better at accepting myself for who I am and I try not to find my self-worth in how I stack up to others. Still, occasionally I feel the tug to “catch up” to people around me.
My daughter’s friend’s family is always going on vacations to Disney World or Hawaii or taking a cruise. When she tells me about their latest trip, my jealousy meter goes off. Traveling is my biggest envy trigger and the one “status” symbol that tempts me into debt more than any other.
When someone else tells me about their amazing vacation in London, my gratitude bucket starts leaking, fast.
Rachel reminds us of the importance of learning to be content. When we’re not content, we’re always looking for the next thing to buy or do or consume that we think will offer fulfillment. But it never ends, because that’s not where fulfillment is found.
The key is being grateful for what you already have. When you’re grateful, you can be content. Without contentment, it’s almost impossible to save money. Comparing yourself to others and not being content with your current situation is like the gas that fuels the chase for that next big purchase. When you’re satisfied with what you have, you don’t “need” to spend money on more stuff.
Start with practicing gratitude. When you’re grateful for what you have, you’ll be content to not keep up with everyone around you. Your priorities will be different, and you’ll be following a different path. Your eyes are on a different prize, and your focus is on the future.
Saving up a 3 to 6 month emergency fund isn’t just about having the discipline not to spend. It’s an emotional exercise that challenges our hearts to change. When our hearts are focused on gratitude, we can find contentment.
Don’t Be A Fake
Chris Hogan, the author of Everyday Millionaires, takes over the last segment of the video.
He begins by telling us that getting through baby step 2 is like getting a raise, because you’re taking your money back. You’re out of debt and now you have more control of your income.
It’s important to be intentional about all this extra cash flow. Otherwise, you’ll never get out of the paycheck to paycheck cycle.
You may feel a false sense of security now that you have wiggle room in your budget – but the fact is, just because you’re out of debt doesn’t mean you’ve reached financial freedom.
There are a lot of people out there who look like they’re doing great financially. New cars, big homes, the latest gadgets. But when you remember that 80% of Americans live paycheck to paycheck, the reality is that most of them are not doing as well as they look.
You don’t want to just *look* like you have money – you need to be intentional about working a plan that will actually get you there.
This is why the fully funded emergency fund is so important.
When your car breaks down and the fridge goes kaput, you’ll be ready.
Even if you get laid off, you won’t need to stress about covering the bills.
You won’t need to take a loan out from the bank, borrow from your 401K, or start charging up your credit cards.
Your emergency fund will eliminate fear, stress, and drama. You don’t want drama, you want progress – and progress comes from learning from mistakes. It comes from thinking differently, doing things differently, and being wiser with each step forward you take.
Figuring Out How Much You Need
Should you save three months of expenses? Or six? Or somewhere in between?
Chris tells us to consider how stable our income currently is.
If you are self-employed, a contract worker, or are the sole provider for your family, you should work towards the six month mark.
If you’ve had a steady full-time job for several years, or your spouse contributes a significant amount to your monthly income, you can stay closer to a 3 month fund.
And remember that you aren’t working towards replacing your entire monthly income. Your goal is to have enough to cover all of your necessary expenses.
So don’t just look at your paycheck when figuring out how much you need to save. Look through your budget and pick out the categories that are non-negotiable. So, things like your mortgage, utilities, and groceries. Leave off movie tickets and Starbucks frappuccinos.
Chris recommends using a money market fund for your savings. This keeps your money liquid (easily accessible) but also earning more interest than a regular savings account. Don’t be concerned about having all this money just sitting in a bank account. It’s not an investment, it’s insurance.
It’s also not fun money – so start saying “no” more often to extra, unnecessary expenses. Don’t use it to go see your favorite artist in concert or take a weekend road trip. Remember – gazelle intensity.
Finally, two important points:
- Talk to your spouse or partner about what an emergency is identified as (e.g., a flat tire is an emergency, upgrading your phone is not)
- When you use all or part of your emergency fund, build it back up to its original balance. This needs to be priority #1!
Of course, the amount of time it takes to complete each of these baby steps will vary for each person or couple.
For some, it could take years to pay off your debt. For others, the emergency fund may take the most time.
As your bank account changes, so will you. Your mindset, your behavior and your priorities will all start lining up with your one big goal: financial freedom.
It takes time, focus, and sacrifice. You’ll be tempted to quit and go back to your old, comfortable habits. You might feel like everyone around you is moving forward with life while yours is standing still.
Remember what Dave says – live like no one else, so later you can live like no one else.
Baby steps 4-7 are next, and are meant to be done simultaneously. They are all about looking towards your future. It’s where you work on building your wealth and accomplishing your dreams.
Stop looking around you at what others are doing. Decide for yourself that you are committed to doing what it takes to reach financial freedom.
Keep going! You can do it!