As freelance writers, our income is very unpredictable. We can set income goals, market ourselves, and create several income streams, but the truth is that it’s hard to say with certainty how much money we’ll make next month or six months from now. Even with contracts, clients come and go. So do the advertisers and sponsors that pay for our own blogs.
A fluctuating income is just one of the facts of freelancing. It doesn’t mean you have to go back to your day job. Instead, we have to prepare for income fluctuations. One way is have an emergency fund.
An emergency fund is a savings – ideally three months to a year’s worth of living expenses – that you can tap into when an emergency comes up.
What’s an emergency?
Some people have broad definitions of emergency. These are some of the things I consider emergencies that are serious enough to dip into your emergency fund:
- A major car or home repair that’s not covered by insurance
- Car and home insurance deductibles
- Unexpected medical expenses
- Disability that keeps you from doing work
- Computer repair or replacement
What’s not an emergency?
- A broken television
- Medical expenses that you knew about in advance
- The latest iGadget
Why an emergency fund when I have a credit card?
An emergency fund keeps you from using credit cards to fund major expenses. You want to avoid credit card purchases, especially if you can’t afford to pay the bill in full, because they cost more money in the long run. Plus, it gives credit card issuers more control over your finances. Credit card issuers can raise your interest rates, create new fees on your account, lower your credit limit (which hurts your credit score), or cancel your credit card. If you don't pay, they can send you to collections, trash your credit report, and even sue you. Use credit cards for convenience, not necessity.
How to Build an Emergency Fund
An emergency fund isn’t automatic. It takes time to build your emergency fund to the ideal level of three to twelve months of living expenses. To make it easier and keep your motivation, start building your emergency fund with a smaller goal in mind, like $500. Then, once you meet that goal, increase the amount.
I recommend putting your emergency fund in a high-yield online savings account like one from ING Direct or HSBC Direct for a few reasons. First, you’ll earn more interest on your savings than you would with many other traditional brick-and-mortar banks. Second, because it’s harder to access the money in the event of a spending attack. A bank transfer takes a few days. Finally, you can set up free transfers into your online savings account from your primary checking account. That means no trips to the bank are necessary.
Having an emergency fund is too important to procrastinate. Take a look at your monthly budget and decide how much you can afford to contribute each month. Let your emergency fund contributions fluctuate with your income. The months you make more contribute more. The months you make less contribute less.
Remember that an emergency fund is different from a regular savings account. This isn’t something you should use as a down payment on a home or for Christmas shopping. Instead, use that money for an unpaid expense that would lead to financial ruin.
There’s your financial lesson for the day! Any questions? Maybe you have an expense in mind and want to know whether it's worth dipping into your emergency fund?