Emergency funds are simply sums of money put away in some form and saved for unplanned expenses. It is a little bit of security for things that are just plain unexpected. Being prepared for the unexpected in a sense. It is defintely familiar to me why you need an emergency fund. It is the difference between being shocked and scrambling to calmly handling whatever unplanned event life has handed to you. For example, a couple of months ago it was raining. I would not have normally been at home that day, if not for the pandemic. I turned and looked out the window and it was raining hard. Pouring down on my porch. My covered porch, that is. Upon further research, we realized that the roof has a hole that was allowing the pouring water to come in. Que the EMERGENCY FUND!
Why do you need this emergency funds?
I have seen enough of those things happen to know that we need to plan for emergencies. Over the years we have had unexpected car repairs, had to replace a well pump, had to take down trees, and emergency dental work. All expensive things. We have not always had the money to pay for those things and were forced to use credit and pay for it over time. It is not fun to fork your hard-earned money over month after month. Remember the roof? In a couple of weeks, we will have it replaced. It is going to be really expensive. The emergency fund has been very helpful in planning how to pay for this large expense.
Now, things seem to be somewhat better economically (although the pandemic hasn’t really helped the economy) but a few years back our economy tanked. Things looked bleak all around. When times like that come around, it sometimes makes you think back and wish that you had not spent money or bought this or that. Like did I really need that new purse or to go to Target? I wished that I had saved more and spent less. During this time, I started to really think about and focus on saving money and emergency funds, as well as planning for these times because it very well could happen again.
“Do not save what is left after spending; instead spend what is left after saving.”
How much do you need?
Well, it depends on who you ask. You will have to decide what you think that you need for emergencies in your current situation. Then double that! Things always cost more than you think. The first rule that I personally follow is to keep $1,000 in cash. When small emergencies arise, I pull from that fund and replenish it as soon as possible to bring it back up to $1,000. This alone has reduced stress in my life.
For the second emergency fund, 3-6 months of income is a good place to start. Some say that 6-8 months is more realistic, but you had to do what is attainable to you and work up to those higher levels over time. This is an insurance policy of sorts should you lose your job or must make some of those large repairs like me such as a roof, well, or car repairs. This is the difference between being able to take time and find your right next job or stressing about where your next mortgage payment will come from. Planning for emergencies is the difference. While it takes time to save emergency funds this size, there is no doubt that it is worth it.
Here is a video from Fidelity which illustrates a few facts about emergency funds:
Will you ever stop needing or making emergency funds for emergency preparedness?
NO! You will not. Emergencies come and go, so you will always be replenishing your fund. But what this will do is to keep you out of debt. It will also be the very thing that you need should you have an unforeseen illness. No one would ever really want to plan for that but unfortunately, emergencies do happen. And guess what? If you never have any emergencies, then you will have a giant pile of money sitting there. But the chances are pretty good that you will have an emergency, and if so, wouldn’t it be amazing to be prepared?
Where do you keep your emergency fund?
For the first $1,000 I would keep it in cash close by. This way it is easily accessible for a household repair or in the case that you could not get to the bank. For the rest, of course, put it in the bank. But keep this separated from your normal operating funds, in a separate account. It is best to keep an emergency fund liquid, so do not put it in an investment account because in case of emergency you may not be able to get it out right away. This Washington Post article discusses different ideas on where to keep your emergency fund…
What if you do not have a lot of money?
Save a little at a time. It is so worth it to work towards the goal of having an emergency fund. Take what you have and save as much as you are able. Is there anything that you can cut back on? Can you do a side hustle or extra job to make some extra money? Sell something that you don’t need? There are so many second job opportunities out there if you take a look. We are living in an era of convenience and there are many jobs out there now related to that with flexible schedules that could help you build your fund.
Other ways to save besides emergency funds…
There are other ways to plan for unexpected expenses in addition to emergency funds. Sinking funds are also a good way to prepare for those things that do not go in your typical monthly budgets, but that happen quarterly or yearly. You can also use sinking funds to save for large expenses such as a car. Look here to link to Opening a Christmas Club, my post on why you should have that type of savings. PREPARING IN ADVANCE is the common thread.
Even if you do not have a lot of money to spare, you can save a little at a time to fund your emergency fund and sinking funds. The stress and debtthat most certainly comes with emergencies can be reduced by being financially responsible prepared. What a great feeling it will be not to worry about where the money will come from for large expenses. Let us hope for no emergencies and prepare for many.
Think about this…wouldn’t you rather be prepared, than not be prepared? Take a look at these related posts about saving and money:
Why should have a Christmas Club – an amazing way to shop guilt-free! Teaching your kids about money
And remember, you need an EMERGENCY FUND, and you need it now! Start saving today!
Mrs. Accountable
Ashley Beth says
This is a big goal for me this year.
Megan says
What a great article. Having an emergency fund can bring such peace of mind!!