If anything can go wrong… it will! –Murphy’s Law
Things go against your master plan in life. The car needs a new alternator, a pipe freezes in the basement, the kid breaks a limb, or you lose your job. Having a 6 month disaster fund gives you freedom and reduces stress when unexpected things happen.
The disaster fund is different than the emergency fund we started with while paying off debt. The emergency fund was $500 and covered simple problems. The disaster fund is intended to take the emergency fund to a new level but is also different than the wealth building accounts. The disaster fund should be in a liquid, readily available format, such as a savings account at your local bank or credit union. We use an earmarked account at our local bank.
It’s important not to touch the disaster fund. It can be tempting to reach into this fund to buy a new car, or upgrade your shoe collection. Stand firm. Leave this account alone. As soon as you drain this account, Murphy will move into your house and things will go wrong which means you will have to finance disasters on credit cards and start the downward spiral again!
After your debts are all paid off, refocus your budget on the disaster fund. Take the extra money that you had been using to pay off debts to begin building the disaster fund.
How much? We recommend calculating your household take home pay (after taxes retirement, social security, etc. are taken out) and multiplying that value by 6. This should give yourself or your family the security to handle the most expensive things that could happen, like losing your job. In the past generations, almost everyone had a disaster fund. This allowed many to ride out low points in our history such as the Great Depression. Should a financially troubling period occur, most American’s currently live paycheck to paycheck. This is why we want to spark a movement of Drunk Millionaires who have disaster funds, and as a result options should anything occur. Additionally other countries largely participate in this type of saving. It’s common for Chinese citizens to have a year of savings to protect against disaster.
Keep in mind that while you are on this step, you must remain on this step until you’ve completed the disaster fund. Don’t start building wealth yet. That would be stupid. Once you do have a disaster fund set up then you can start to have fun and build wealth!