You need an emergency fund. Your emergency fund is your defender against anything unexpected. Learn how to calculate, save, and start your emergency fund today!
Does the thought of a potential emergency stress you out financially?
Can you handle a sudden loss of income or major medical expense?
Could you afford to fix a large home repair, or do you know what you would do if you were in a car accident?
These are overly stressful situations that we would rather not think about.
But the reality is something bad will eventually happen.
Whether it is to an extreme or just a regular visit from Mr. Murphy we need to be financially prepared.
Bank rate states that 37% of Americans would borrow money if hit with an unexpected bill.
And even during a pandemic, only 39% of Americans could comfortably pay for just a $1,000 emergency.
Speaking from experience, I can not stress enough how important it is to have an emergency fund so, let’s talk about how we can increase our savings to protect our futures selves.
What is an emergency fund
An emergency fund is money set aside and used for unfortunate accidents and unexpected expenses.
Often emergency funds are used for things out of your control like a job loss, major repair, or sudden medical expenses.
For the reasons stated above, having an emergency fund is extremely important.
How much money should you have in an emergency fund?
Well, that depends.
The recommended amount for an EF is 3-6 months’ worth of expenses.
To find out your target amount, you need to add up all your necessary living expenses.
- Housing
- Transportation
- Food
- Utilities
- Cell phone
- Personal responsibilities (pets, children, dependents)
- Minimal debt payments
For example:
Let’s say that came out to $3,000.
According to the 3-6 month rule, your EF amount should range from $9,000-$18,000.
Your amount should be based on a bare-bone budget. Meaning it doesn’t include eating out, entertainment, or nonessential expenses like Netflix.
Some financial experts suggest a 12-month emergency fund, which would push an average $3,000 monthly cost to a savings of $36,000.
Emergency fund calculator
Here is a great emergency fund calculator provided by Ally.
Is $1,000 enough?
Many of you have heard Dave Ramsey recommend saving $1,000 first, then paying off debt, and then saving a 3-6 month emergency fund.
$1,000 can feel insufficient and I understand your concern.
What if something more expensive than $1,000 happens while you’re paying off debt?
You can read more about how my husband and I handled that situation HERE.
What I recommend is YOU NEED TO DO WHAT MAKES YOU FEEL COMFORTABLE.
The reality is some people don’t have $1,000 in savings. Some people don’t even have $100.
A smaller emergency fund will cover things like a blown tire, unexpected bills, an emergency vet visit, or a plumber.
But $1,000 surely wouldn’t replace a transmission, roof or keep you afloat during a loss of income.
Decide what you are most comfortable with and save that.
What to consider when saving for your emergency fund
Do you have a nonessential job? Is your car older or unreliable? Do you own a home? Do you have children? Are you married and reliant on your spouse’s income? Do you have sinking funds?
These are all things to consider.
If you are single, with a newer car, living in an apartment with good health insurance. Maybe $1,000 is plenty.
Personally I don’t think $1,000 is enough.
I can also confidently write that after almost 5 years we have never once had to use our emergency fund.
This is a situation where YOU DO YOU BOO.
How to start saving
Now that I have convinced you that you need an emergency fund, even if it is just $1,000. How do you start saving for one?
First, you need to set a goal amount. Your amount is what you are most comfortable with.
Read more about how I set my financial goals HERE.
Saving for an emergency fund can be easier than you think, especially if it is your main focus.
Second, now that you have a target amount, you need to have a budget.
If you haven’t started a budget yet CLICK HERE.
Any leftover income at the end of each month/pay period will go straight to building your savings.
If you cut your expenses enough, you should have a few thousand dollars saved in no time.
Start small and add more as your life gets more expensive or your liabilities increase.
When money is tight
If money is tight and finding extra at the end of the month is difficult, here are some suggestions.
- CUT YOUR UNNECESSARY EXPENSES. If you can’t afford savings, you can’t afford Netflix.
- Sell some stuff. If you have clothing, unused items, electronics, a basement full of clutter, books, home decor. Sell it. There are those in the community that sold boats, cars, furniture, appliances, you name it!
- Second jobs. Everyones least favorite way to save. But if you are just trying to save a few thousand dollars quickly this could be a great way.
Being debt free also makes saving money easier.
If you don’t have $500-$1,000 worth of debt payments, that money can then be saved instead. Hence why Dave Ramey’s baby steps are set up the way they are.
Another great way to to start saving is to automate.
Let’s say your goal amount is to save $10,000 in 6 months.
That means you need to save $1,666 per month for 6 months.
Automate that transfer from your bank to your savings BEFORE you spend that money on something else. That way you are guaranteed to reach your goal.
Emergency fund vs. savings
An emergency fund is a form of savings
But so is a Roth IRA, a 401k, sinking funds and a 529.
An emergency fund differs from other types of savings because all of your money is spent and saved with purpose.
The purpose of your emergency fund is to save for unexpected expenses.
Saving for your Roth and 401k is saving for retirement.
Your sinking funds are savings for larger, expected expenses like a vacation or a home.
An emergency fund is a form of savings with a specific purpose.
Where to keep your emergency fund
Your emergency fund needs to be kept somewhere that is easily accessible.
I highly recommend a high yield savings account.
That way you can earn the most amount of interest as possible while still having almost immediate access to it.
Saving your EF in a HYS account also protects you from using it.
If you get at all tempted, it is better to have it somewhere other than your regular bank.
Some popular HYS accounts include Ally, Capital one, Citi bank, and Marcus by Goldman Sachs.
No you shouldn’t invest your EF.
Emergency fund example
So how much do Michael and I keep in our EF and why?
While we were living in an apartment, with new cars, no children, no pets, both working nonessential jobs, one of which was mostly commission, and Michael’s medical condition, our EF was $10,000.
Once we purchased a house we wanted to increase that amount to $25,000.
And after both losing our jobs due to an unforeseen pandemic we upped that number to $50,000.
Our monthly necessary expenses sit around $3,000 per month. That is our mortgage, electricity, gas for our cars, groceries, our dog max, car insurance, and internet.
We are also completely debt-free.
$18,000 would allow us to live for 6 months with absolutely no income.
We have been unemployed now for almost a full year.
If we didn’t have government assistance, our stash would have expired a long time ago.
We are comfortable with $50,000.
Excessive or not, for the foreseeable future, we will be keeping it at $50,000.
If for any reason, that amount seems unnecessary we will put it towards investing or F-you money.
JL Colins speaks on F-you money and the importance of it.
Our real life emergency’s include but aren’t limited to…
- A $500 emergency vet visit for max
- A $1,000 tooth issue
- The heating element in our stove bursting 2 weeks into buying our house
- Complete loss of income
- Car repairs painful but necessary and remember the more expensive the car usually the more expensive the part 🙂
- Hot water tank and furnace service
- The day before Christmas Eve we had a major pluming issue in the kitchen
- We had a storm uproot a tree and damage the side of our house which still needs to be attended to
and thats just to name a few…
Murphy doesn’t make any exceptions.
I also have to admit I did not love this part of our financial journey. I was more motivated and felt more accomplishment when we were paying off debt.
Believe it or not I liked watching our numbers go down, not up.
If you are currently working on your EF and are having a similar experience, just know you’re not alone.
If it takes you a while to get to your target amount that is ok.
The power of an emergency fund
Having an emergency fund allows for those inconvenient life moments to be less inconvenient.
It gives you the power to pay for necessary things when they arise. And gives you the ability to sleep at night.
What we do with our money is something we have the ability to control. What we can’t control are the circumstances.
Living through a global-wide pandemic is a circumstance none of us could have predicted. But being financially prepared for a disaster is.
I can not stress how important it is for you to have some sort of savings, even before paying off debt.
Just remember, your savings is meant for protection, and once you feel protected, you have enough.
Key points:
- An emergency fund is for just that unexpected, unpredictable expenses
- Start with smaller savings and increase the amount over time
- Everyone’s amount is different
- Keep your savings in an HYS account
- Do not touch it unless it is an actual emergency
- Your EF should consist of all your necessary expenses
- Consider what you would need if you lost your job today
Interested in reading more
The best way to budget for beginners
When have you had to use your emergency fund?
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