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Having a starter emergency fund is a MUST if you don’t want to find yourself stressing and pulling your hair out when life throws you curveballs.
Notice I didn’t say “if” because it’s not a matter of if, but a matter of when.
You already know life never goes as smoothly as we wish it would, that’s just a given fact. We can have all our I’s dotted and T’s crossed, but in the snap of a finger, the unexpected can happen.
There are times when an emergency situation that causes us to open our wallets will happen. Our reaction is based on how prepared we are for the unexpected.
Let’s dive into some of the most asked questions about emergency funds so you can thoroughly understand them and start your own emergency fund.
What is an emergency fund?
Basically, an emergency fund is money that you set aside to designate for emergencies. These are unexpected situations that cause you to spend money that you didn’t or can’t budget for in a relatively short amount of time.
It’s your “cushion.”
And when by emergencies, I mean things like
- job loss
- car wrecks
- a lawyer because of a lawsuit, etc.
These emergency fund examples are all scenarios that are not expected but may find their way into your life and put you in a financial bind.
But, let’s talk about what an emergency fund is not. It’s not going to your favorite clothing store because they are having a mega sale and you feel like you just need to go get that good deal. Tapping into your emergency fund just because your bank account is on E is a no-no. That’s what sinking funds are for 🙂
What are emergency funds used for?
Emergency funds are used for any financial situation that arises in which you have not already planned for it in your regular budget.
The car breaks down.
You have to fly out for an unplanned funeral.
Your kids have to have emergency surgery.
Illness requires you or your kid to go to the ER.
The water heater breaks.
Another dire reason to have an emergency fund… job loss. This is also when you’ll use your emergency fund, which is why knowing how much money to have in it is key.
Really an emergency fund is whatever you think an emergency is in your life, so you really have to think about what you deem necessary to use those funds on.
Are emergency funds necessary?
They are absolutely necessary for everyone who is responsible for paying any type of bill. My mom used to call it her “rainy day fund.”
Having an emergency fund will prevent you from having to rely on credit cards when emergency expenses show their face in your life.
Emergency funds give you peace of mind.
How much money should be in my emergency fund?
The amount you need in your emergency fund will vary from person to person really. And it kind of depends on where you are in your financial journey. Some people may not need to start with as much as others.
You really need to evaluate what type of unexpected expenses you might incur and go from there. What types of emergencies would you want this emergency fund to cover?
Don’t forget that buying insurance (rental, home, car, life) can be a cost effective way to offset some emergencies you might have.
If you are in a two income household, maybe one income can sustain your living expenses in the event of job loss etc. In that case, maybe your emergency fund does not need to be huge to begin with.
If you work a job that you’d be able to replace in a heartbeat, you could probably get by with 1 month’s worth of living expenses.
Maybe you’re in a place where paying off your debt is the primary focus. Financial guru’s like Dave Ramsey (the founder of Financial Peace University) recommends only having a $1,000 emergency fund until all your debt is paid off.
However, you honestly have to evaluate your situation and your life. If you know that $1,000 isn’t even close to what you would need to cover the cost of a true emergency in your life, then you need more.
How large should your emergency fund be?
You remember how I said ultimately you get to decide what an emergency means in your life and what you’ll agree to spend the money on?
The more emergencies your emergency fund will cover, the larger your emergency fund will need to be.
The more money these emergency funds will require you to have, the more you will need to save and plan for them.
Many experts recommend 3-6 months of living expenses in your emergency fund to begin with.
Some even deem a fully funded emergency fund being 12 months of living expenses.
How you come up with this figure is by breaking your budget down to its bare bones.
- What expenses do you need to pay in any given month to be able to live on?
- Add those expenses up.
- Then multiply that amount by 3, 4, 5 or 6 to come up with your exact emergency fund amount.
- Whatever number you chose to multiply that original amount by is the size of your emergency fund.
Example: If my livable expenses come to $3,000 per month and I multiply that number by 3, I need $9,000 to have a 3 month emergency fund.
How can you build an emergency fund?
1. Create a budget
You’re going to see that creating a budget is the foundation to most things money related, including saving for your emergency fund.
Really though, you have to be aware of the money you have coming in and the money you have going out.
Personally, I’m a “pay yourself first” kinda girl, but if you’re not, that’s okay too.
But, make your emergency fund a line in your budget and each month when you sit down to do your budget, designate a certain amount toward your emergency fund.
2. Determine a savings goal for each month
Now that you know what your money really looks like, you’ll want to figure out how much money you want to save each month.
Continue to save each month until you hit your savings goal. And trust me, you do want to have a bottom line amount or else saving with no end goal in sight can lead to losing motivation.
If you can’t afford to come up with a monthly savings goal because of how your finances are, then just commit to saving something each month.
You will watch your emergency fund grow over time.
3. Make changes to your goals as needed
As time goes on, you may realize that you can adjust the amount you save each month. Perhaps, you’ve figured out how to bring in some extra money in a given month, so now you may now be able to save a bit more than usual.
Maybe you’ve come to realize that your initial emergency fund goal amount is more or less than you actually need, so you can make adjustments there as well.
How should you try to save for an emergency fund?
You know those times when you’re doing laundry, and you find a $1 bill here or a $5 dollar bill there, or you happen to wear a jacket you haven’t worn in a while and find money in the pocket?
Those few bucks can be used to add to your emergency fund, heck you can even start your fund with that. You don’t have to start with a ton of money. You just have to start and commit to building it up every chance you get.
Some other things you could do to get extra cash:
- Saving all your change (coins)
- Saving any $1 or $5 bill that you receive aka $1 dollar challenge or $5 dollar challenge
- Sell clothing/shoes you no longer wear on Poshmark
- Sell things around your house on Mercari or eBay
- Use cash back apps
- Deliver with DoorDash
By the way, I have a fun challenge that helps you save $1,000 in 3 months.
Where should you put your emergency fund?
Honestly, you could just put your emergency stash in a safe place wherever you want as long as you have easy access to it and are disciplined enough to only use it for true emergencies.
But, you should put it in an account that’s federally protected with insurance.
What kind of account should you use for an emergency fund?
Because you want to be able to have easy access to your money, make sure you’re not holding your money in a CD account or something of the like.
Your emergency fund is not an investment and you can’t think of it like it is.
Your money needs to be held in liquid accounts – quick and easy access. But, at the same time, you don’t want to be able to access so easily that you’re using it on things that are not true emergencies.
Ideally, you’ll want to put your emergency fund in a checking account at a bank that is not attached to your primary use accounts.
Separate your emergency fund account from the rest of your accounts with your main intention being to continue to make deposits, and not withdrawals.
Some people also elect to hold their money in savings accounts and money market accounts that have a higher interest rate, but remember this is not an investment and there are governed limits on how many withdrawals you can make in any given year.
When should you use your emergency savings fund?
Before you make the decision to pull from your emergency fund, you want to ask yourself a few questions to make sure it’s truly an emergency.
1. Is this event unexpected?
Being caught off guard and being unexpected are two different things.
You know Christmas comes around every year, but just because you forgot to plan for it doesn’t mean it’s unexpected.
You’re just caught off guard now because you failed to save for Christmas throughout the year. This is not a time when you could consider using your emergency fund.
An unexpected event is one that you didn’t plan for because there wasn’t a need to plan for it at the time.
Some common unexpected events are:
- Job loss
- Medical emergency
- Pet emergency
- Family emergency
- Natural disaster
2. Is this event urgent?
This is gonna be considered an urgent event if you need the money like RIGHT NOW.
I mean, like there’s no way you can afford to wait a few months to budget for this event to be able to cash flow it.
3. Is the need for money out of necessity?
This is where you have to really ask yourself
- Is this a need
- Is this a want?
Let me give you an example of both.
I sold my 2013 Chevrolet Traverse that had all the bells and whistles. I now have a 20 year old car that doesn’t have a remote start feature, but it’s winter time and it’s cold.
I mean I do have kids that I have to transport. The car needs to be warmed up before driving off and they shouldn’t have to sit the cold and wait right?
Remote start would sure make things easier, and warmer for us. But, the remote start is still something I only WANT, not NEED.
You start experiencing excruciating abdominal pains so you go to the emergency room and get the full work up.
Doctor’s determine that your appendix has burst and you need immediate surgery. You know that your deductible hasn’t been met so insurance won’t cover it all, but this is a life or death moment and you NEED the surgery.
The bill comes and it’s $2,000. This is what your emergency fund is for.
I hope those two examples show you how to spot the wants and needs in your life.
What happens after you use money from your emergency fund?
Whatever money you use from your emergency fund, you’re going to set a goal to replenish that amount as quick as possible.
- Look at your budget and see where you can cut costs
- Raid your closet and figure out what can be sold on Poshmark, Mercari or eBay
- Work some overtime at your job
- Pick up a part time job
What should you do if your income is low?
Regardless of what your income is, you should still set aside something each month to go toward your emergency fund.
Decide whether you can commit saving a certain percentage of your income each month, like 5 or 10 percent. Sure, it may take longer, but the more important part is that you’re starting somewhere and that money is going to continue to build up.
Using a certain percentage versus a certain amount is better because if you happen to work overtime that particular month, your income will be higher therefore the amount you save will be higher versus just choosing to save $50 each month.
If there’s ever an opportunity for you to take to make additional income, take it. Do whatever you can do to earn additional money to build your emergency fund.
What’s the difference between an emergency fund and a savings account?
A lot of people wonder if an emergency fund is the same as saving money in a savings account.
You can think of an emergency fund as a type of savings account. However, this emergency fund is going to be more liquid than your typical savings account.
This emergency fund will require that you have easy access to it in the event that you need it.
A regular savings account is one that you hold in a bank account, possibly a certificate of deposit account. The goal of this account is not to spend it, but to let it sit and earn interest on it.
The government places a limit on how many times you can withdraw from a savings account in any given year.
Summarizing the importance of emergency funds
There are so many other expenses that you could include in your emergency fund. It’s literally impossible to list them all here because everybody’s life is set up differently.
But, your emergency fund becomes your safety net in the event that one of those unplanned moments do happen.
It’s better to have it and not need it, than to need it and not have it.
I’ve answered some of the most commonly asked questions about emergency funds.
If you’ve found this post helpful, please share it with everybody you know. We all need to know how to be prepared when stuff hits the fan.
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