If you’ve watched my previous YouTube videos or read my older posts, you must now be familiar with the concept of emergency fund. I brought this topic in my video about retirement as well as in the first episode of my series where I gave basic tips to become financially stable as an artist. Saving for an emergency fund may sound like an easy thing to do, but believe me, it is hard. The main reason people fail to save for an emergency fund stems from two situations:
1- The person is not disciplined with their spending. There is a chance that the person ends up spending all of their earned money in stuff and struggle to save altogether. This is sometimes routed in a deeper level of the person’s history, often in the way they were brought up by their parents.
2- The person gives up too quickly. There’s a tendency to believe only privileged people can afford to have an emergency fund. “I get paid minimum wage, I can barely cover my basic spending, how do you expect me to save X amount ever? It’s impossible, so might as well just live with what I have”. Sometimes, when a person has a too high expectation in terms of financial performance, they easily get discouraged and quit before even trying. It’s easier to never try than lose trying, right?
If you’ve been struggling with saving for an emergency fund, there is a possibility that you fit within these two situations. If that’s the case, it doesn’t mean that your case is lost forever and you will never be able to save for your future or that you’re doomed financially. It just means that you will need to work a little bit harder to keep yourself on track. It also means that you might have internalized negative perception about money and financial success. This happens often when growing in a lower socio-economic demographic or in the case of having parents with spending, gambling or other money-related issues. In my case, I know I had to reconcile a lot of negative thought patterns I had about money in order to develop better spending habits and become better with my finances. I am still working on these issues today, so it is by all means a tedious work, but very important. Talking to a therapist definitely helps too.
But this in the main point – Saving for an emergency fund is important. Many personal finance experts argue that it is the first thing one should do when building a stable financial plan. An emergency fund is basically an amount of liquid money that’s saved away and that it not used for every day spending, except for important situations or emergencies. Emergency situations can be as trivial as a car breaking down suddenly and you need to pay the repairman a substantial amount of money. Or it could be a more life-or-death situation, like an emergency hospitalization or losing a job during a recession. It is not used for frivolous spending like buying a brand new car just because or taking a luxury cruise in the Caribbean. You should have a separate fund for these types of spending. Usually those are called sinking funds.
I understand that as an artist or a creative, the money you earn might not always be constant and regular, like in the case of a traditional salaried job. So, it might be difficult to imagine how you could save a certain amount of your earnings and put these in your emergency fund every week or every month. But it is possible, if you follow the below steps.
1 – Track your expenses and determine where your spending is going.
As you know, I don’t believe in budgeting that much. Instead, I recommend tracking your expenses as a more efficient way to track where the bulk of your money goes every month. Check out my free expense tracker tool – This allows you to track your daily expenses and have an idea at the end of the month/year your expenses allocations.
2 – Separate every day account vs. emergency fund account.
Have an account for your everyday cash spending (e.g. paying rent, paying your credit card) and try to keep that account at an exact amount at all time.
Send any extra or exceeding money to your emergency fund, which should be in a different account. It could be a traditional bank saving account, but it is better to leave it in a GIC. A guaranteed investment contract (GIC) is an insurance company provision that guarantees a rate of return in exchange for keeping a deposit for a certain period.
3 – Automate your savings
If you receive regular income (e.g. passive income), a good way to reinforce saving habits is to automate savings. Every month, a specified amount is taken from your main account and deposited in your emergency fund. This is probably the most efficient & effortless way to save, and it takes a lot of stress off your shoulders while keeping you accountable to your goal.
4- Find ways to increase your income or decrease your spending
Take Bob – Five days a week, he takes the subway to go to the studio. It costs him $4 back and forth. Bob looks at his expense tracker and realizes that he spends $86 every month on local transportation. That’s $1040 every year! If Bob decided to take his bike to work every day instead, he’d easily save $1040 extra for his emergency fund. Not counting how biking is a better exercise than standing in a stinky, crowded subway.
I understand that making more money can sometimes sound very difficult, especially when you’re an over-worked artist or that you have a kids to take care of or a fragile health. However, I have come to learn that although earning more is challenging, There is always a way to save more. The most important is that you can increase the distance between your expense vs. earnings ratio. The less money spent on useless stuff, the more money can be saved towards your emergency fund.
5 – Have an exact amount in mind for your emergency fund.
This one is very important as it will be the groundwork for all of your financial plan. Are you saving enough money for small emergencies or for a longer sustainable timeline? Depending on your age and situation, this one will be different from person to person. If you’re a young student, you might not need a big amount to save. Usually, one or two month worth of expenses is enough. If you’re older, or if you have health issues or if you have kids, usually it is best to save for at least 6 to 8 month’s worth of expenses.
6 – Give yourself a deadline but be reasonable.
Sometimes people give up halfway because they set up an overly ambitious plan to save thousands of dollars in a few weeks. Check your monthly expenses and try to estimate your future earnings for the year. Take the difference for the year and double the logical, estimated deadline. This will take off a lot of pressure from your shoulders while keeping you accountable to your plan. As you start to save and see your emergency fund grow, you will feel more and more motivated to save more. You might even end up reaching your goal before your deadline with the positive reinforcement of seeing your actions actually providing concrete results.