There’s a powerful tool each of us should strive to have as a fundamental part of our financial toolset. An “Oh Shit Fund” (OSF) aka an emergency fund. When I tend to think of emergency funds, I think of it as this very “adult” type of thing. Something that I don’t get a lot out of. I challenge you to think about this differently.
How To Think About an OSF
During the course of your life, you may find yourself in a job that you can’t stand any more, a roommate situation no longer viable, or find yourself in a setting that you need to change. One of the primary things you will need to exit these situations is money. To not have that job, or to find a new place, or to move cities. Having an OSF isn’t a box of money buried in the ground. It’s an asset that allows you to live your life the way you always envisioned. Picture yourself in one of those situations, but not able to take action because your OSF doesn’t exist. Not that great, right?
Important – If you carry credit card debt, I wouldn’t recommend starting an OSF. Credit cards have notoriously high interest rates. It’s in your best interest to eliminate this debt before taking action towards your emergency savings.
How Much Should I Have in My OSF?
This is very dependent on your individual situation. How stable is your income? If you’re in a very secure position, having an OSF that covers expenses for 3 months might be doable. If you don’t feel certain, shooting for 6+ months might be a better goal. Given what our world has been through in a pandemic, we probably all want to shoot for more months than less.
Where Do I Go From Here?
If you’re not there yet, this isn’t a time to stress yourself out. Creating an intention to get there will have you sooner than you might think. It might also be easier than you think. I’m going to walk you through getting to a bare bones version of the OSF.
What’s the Number? – Sum up all your essential expenses – Rent, Utilities, Car Payments, Insurance, Food, Cell Phone Bill, etc. – Nerdwallet has a calculator you can use.
Determine Monthly Contribution – How much a month can you begin putting towards this goal?
Automate – Set up an automatic transfer to a savings account monthly/weekly to begin saving towards this goal.
Set Milestones – Locate when you’ll hit each month of emergency savings.
Celebrate! – When you reach your desired milestone, pat yourself on the back. You should be pumped for your future self!
Let's Take a Look at an Example
Jane is 25 years old and is getting started on her financial journey. She lives in Denver, CO where she lives with a roommate. Her essential expenses are about $2,000/month. She currently doesn’t have any savings but she has a goal of getting to an emergency fund of 3 months ($6k). Jane thinks she can afford to save $200/month to begin saving towards this goal. She actually found $200 after slimming down on subscriptions she didn’t need, shopping car insurance for a competitive price, and making herself lunch at work 5 more times a month.
Within 10 months, Jane will have 1 month saved up ($2,000) and her total time to her 3-month goal is 2.5 years. By taking just a few hours to go through this process, Jane will now have the autonomy to make great choices for her future self.
If you think 2.5 years is too long, up the monthly contribution. If Jane upped hers to $500/month, she could reach her goal in 1 year.
Tips to Help You Along the Way
- Keep your OSF at a bank that’s different from your checking account. It can be tempting to dive into this money unnecessarily. If you feel really disciplined, you can disregard, but many will find this helpful.
- You can also bulk up your OSF by including extra expenses like eating out and money for trips. This allows you to maintain your lifestyle while going through transition, if that’s important to you.
- Consider using your tax return (if you have no credit card debt) to boost your OSF at the beginning of each year.
Conclusion
Don’t allow yourself to get leveraged into a tough situation. When emergencies arise, OSFs are an asset that allow you to still have control if you hit a valley in your life. Get started, stay disciplined, reap the rewards.
