Emergencies aren’t a matter of if, but when. When you’re faced with an emergency, having an emergency fund to cover unexpected medical, car, house or other expenses will help minimize the stress during these times. Having an emergency fund with 3-6 months worth of expenses will help you prepare for when an unexpected expense comes up. Learn why you need an emergency fund, how much you should have in your emergency fund and where to keep your emergency fund.
What Is An Emergency Fund
An emergency fund is an amount of money set aside to cover emergencies if they arise. When you first start saving money, the first thing you should fund is your emergency fund. An emergency fund is money that is easily accessible and liquid (such as money held in a checking account or savings account) that you have for when things go wrong. This includes an unexpected health bill, unexpected car repair, if you lose your job and so forth. The golden rule is 3-6 months of expenses but it really depends on your situation. You can find a calculator here to help identify how big your emergency fund should be.
Once you’ve built up an emergency fund you can also use this money to improve your life. For example, moving is expensive. If you aren’t living in the location you want to end up in start building up an emergency fund to pay for the move and the first few months of living expenses.
Why You Need An Emergency Fund
An emergency fund is supposed to be for unexpected expenses, but are all expenses really unexpected? To reduce unplanned expenses, do a bit more analysis and see how you can plan for expenses that aren’t frequent.
Even if you plan for “unexpected” expenses do you still need an emergency fund? The answer is yes. Say you think you’ll have $1,200 in household repairs needed this year. From a yearly budget perspective that averages out to $100 / month? But, what if that expense hits in January? It’s in your budget, but if you were only relying on your paycheck you wouldn’t have the full amount of cash you need until the end of the year. An emergency fund will give you the cash you need in the short term.
An estimated 530,000 American families turn to bankruptcy each year because of medical issues and bills every year. Your health insurance may not cover as much as you think. While health emergencies are truly an unexpected expense, having an emergency fund will help you focus on your health instead of worrying about money during this time.
If you have a car you know you’ll need to perform regular maintenance. This includes oil changes and emissions tests plus other fees like city stickers and insurance. As a car ages, you should assume you’ll need to replace car parts. For example, car tires should be replaced every 6 years or more frequently if you drive often. Estimate when you’ll need to spend more money maintaining your car so you have fewer unexpected big bills.
Of course, no matter how much you plan there may be an accident. For the unexpected having cash in your emergency fund to cover a deductible will help.
If you’re a homeowner you should estimate 1-3% of the purchase price of your home every year for home repairs. Plan for this in your budget and if you don’t end up using it set it aside for the next year. There won’t always be a major home repair but you want to be prepared when it does happen. Roofs will need to be replaced every 20-30 years depending on the material. Furnaces should last 15+ years. Homes usually need to be painted externally every 5-10 years.
Knowing when these were last replaced in your home will better prepare for these expenses.
You never know if you’ll be laid off, or injured where you can’t work anymore. Perhaps your job has become detrimental to your health or you’re feeling burnt out and need some time off. An emergency fund provides some cushion in case your job doesn’t go as planned.
How Much Money Should You Have In Your Emergency Fund?
There isn’t a one number fits all for how much you should have in your emergency fund. The golden rule for emergency funds has been 3-6 months of living expenses. That way if you get laid off you have money in cash to fall back on. If your money is all in investments you’d have to sell investments to cover your daily expenses.
Use the emergency fund calculator by Money Under 30 to determine what the right number is for your emergency fund.
Another way to look at how much you need in your emergency fund is to determine how much money do you need to feel secure? If you lose your job tomorrow or have an emergency repair such as needing a new furnace or a major car repair what amount of money would make you feel secure?
What If You Don’t Have Enough Money to Fund an Emergency Fund?
The toughest time will be when you get started. If you’re starting in debt funding an emergency fund is even more daunting. Your first thought should be how you make more money. Can you start a side hustle? Make more money at your job? Secondly, look for ways to cut your spending so that you don’t accumulate more debt and put that money toward your emergency fund.
There are always unexpected expenses that arise. If you don’t have money to fund an emergency fund that doesn’t make you immune to an emergency occurring. While you’re paying down debt, you should also contribute to your emergency fund so you don’t have to take on more debt when an emergency inevitably arises. That way, you can avoid having to take out credit card debt at 18% interest when an emergency arises.
See Also: How to Save For An Emergency Fund
Where To Keep Your Emergency Fund
The best place to put your emergency fund is somewhere where you can easily access the funds but not too accessible where you’ll spend it on something else. It’s best to have a separate account so you don’t accidentally spend it. It needs to be liquid because you need it in case of an emergency. A great place to store your funds is a high yield savings account. A high yield savings account is a great place for your emergency fund because there are usually limits as to how often you can withdraw money from a savings account and your emergency fund will at least generate some money. Nerd Wallet shares here the top 10 best high yield savings accounts.