Finance 101, Uncategorized

Emergency Funds 101

All about emergency funds

Who needs an emergency fund?

EVERYONE needs an emergency fund!  Emergencies happen at the most unexpected (and usually inconvenient) times, so it is important to be prepared.

If you have dependents, it’s even more important to have an emergency fund.

What do you do if little Jimmy needs to go to the ER?  Unless you have incredible insurance, you are going to be stuck with a pretty hefty bill that might not fit nicely into your monthly budget.

If your primary breadwinner loses his or her job, what happens?  Having several month’s worth of expenses saved gives you a buffer for finding a new job.

When there’s a crazy hail storm and you need a new roof, how do you avoid taking out a loan to finance it?  Use your emergency fund!  If it doesn’t cover the whole expense, at least you have a significant down payment to defray the long-term cost.

How much should be in my emergency fund?

It is wise to have at least three months of expenses in your emergency fund.  Each situation is different.

If you work in an industry where job loss is more likely, it may be better to save for six months or more.

If you have a steady job and multiple income streams, three months may be sufficient.

In my opinion, having more than 6 months worth of expenses sitting in a bank account earning 0.01% interest isn’t a smart financial move.  Once you save your six months emergency fund, consider investing additional savings elsewhere for a higher interest rate.

What is a month’s worth of expenses?

Your monthly expenses are easy enough to figure out if you have a budget.

If you don’t have a budget, just add up your monthly bills, rent, add in how much you spend each month on groceries, and throw in a couple hundred extra for good measure.  Better to save to much than too little!

If that number seems huge to you, don’t get overwhelmed or discouraged.  Aim for $1,000 in your emergency fund to start with!

What is an emergency?

The definition of an emergency differs from family to family.  Defining an emergency is definitely something you should do with your spouse!

Our family defines an emergency as job loss, unexpected medical costs, or tragic damage (think bad car wreck or flooding).

We do not use our emergency fund to pay for car maintenance, routine medical checkups, or new clothes and toys.  Instead, we budget for those expenses and incorporate them into our regular savings.  We have a dedicated savings account for home and car maintenance, and a HSA for medical care.

How do you save for an emergency fund?

An emergency fund should be your #1 priority, even over paying off debt.  Having an emergency fund prevents you having to go into more debt if worst happens.

To save your emergency fund, decrease your grocery bill and cut extra spending for several months.  If you have no give in your budget, try this method for starting an emergency fund.

Other ideas for saving:

  • Sell extra junk
  • Collect spare bills and loose change and deposit them at the end of each month
  • Stop eating out
  • Try a side hustle
  • Use your tax return to build your emergency fund

See more saving ideas on my pinterest board!

Once you have at least one month’s worth of expenses saved, you can re-evaluate to decide if you should continue saving or focus your finances elsewhere.

It’s ideal to have at least three month’s worth of living expenses saved, but every situation is different.  It’s always important to weigh paying off debt vs. saving, especially if you have high-interest consumer debt.

Where do you put an emergency fund?

An emergency fund should be easy to access, so having it in a regular bank account makes sense.

Ideally, your emergency fund will not be associated with your checking account (why tempt yourself?) and it’s best to put it somewhere without any yearly fees, like a credit union.

Our family has two emergency funds.  The first is quick-access.  It’s associated with our checking account, but we are super disciplined about using it (or rather, not using it).  We try to keep at least one paycheck’s worth of cash in there.  That’s enough to give us cash on hand if we need liquid assets immediately.

Our second emergency fund is a high-interest account.  We keep two month’s worth of expenses in that account, with the long-term goal of getting it up to 3 months of expenses.  However, we are currently geared towards making student loan payments so the emergency fund is on the back-burner for now.

I highly recommend keeping a portion of your emergency fund in a high-interest account, because it can continue to grow (slowly, but faster than in your typical bank savings account) on it’s own.

However, our account usually takes 7-10 business days to transfer money out, which is why we also keep a couple thousand on-hand in our bank savings account.  High interest accounts are still easy to access, but it’s good to plan for a time delay getting the money to you.

Read more about how to use a high-yield savings account

Do it now!

What’s stopping you from starting an emergency fund?  Opening a new savings account is easy to do, any time of day or night, on-line.  Open the account with $50 or $100 and build from there – you won’t regret it!

Figure out your emergency fund

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5 thoughts on “Emergency Funds 101

  1. I love this! You provided so much practical information I have been curious about! I am planning to buy my first home soon but I want to make sure I have the right amount saved in my emergency fund first! Thank you!!

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