They always say “don’t wait until hard times to save for hard times” with an emergency fund. Having savings specifically for emergencies has been such a game-changer for my family and our financial confidence. It feels completely different facing an emergency situation with a safety net full of cash. This was something that wasn’t popular or mentally possible for many of my friends and family members. But I knew I had to do something different if I wanted to feel more prepared for any unexpected situations that arise as an adult. If you don’t know what an emergency fund is or how it works keep reading to learn more.
What is an emergency fund?
An emergency fund is simply money that you have set aside for unexpected life events. This money is for real-life emergency situations that can stress you financially, like losing your job or health-related costs. Not for an emergency vacation, shopping spree, credit card overages or coffee runs. Now, I know the term fund can be confusing if you’re not a money nerds like myself. So to simply explain, the term fund just means a pool of money for any specific need. When it comes to emergency funds that is exactly what the pool of money is for, an emergency.
What‘s considered an emergency?
An emergency is anything that has you paranoid financially. Some of the most common emergencies are being hospitalized, losing your job, having a major car or home repairs. A few other emergencies are if you becoming homeless, travel for a death in the family or help a relative financially with an emergency. The range of what is considered an emergency can get a little blurred at times. A good rule of thumb is to make sure that the emergency need is necessary and timely.
Who needs an Emergency Fund?
Everyone who is an adult needs an emergency fund of at least 1 month of their bills. It’s so unfortunate that the average American can’t handle a $400 emergency. This is why it is so important to have one. Who wants to be a statistic in an emergency? Not me and I hope you don’t either because the truth is an emergency can happen to anyone any time. Now, if you’re just starting, I would recommend setting a goal of saving $1,000 as a start. But I don’t recommend stopping at this starter emergency fund until you hit 1 month.
How much do you need?
When it comes to figuring out how much you need you first have to understand how to calculate how much 1 month of your bills. You literally have to list out the average cost for all of your mandatory needs, not including any wants. Don’t get tempted to add Netflix, gym, subscriptions, and going out money to this calculation. You have to focus on what your minimum cost of living would be if you hit hard times.
Now, when it comes to how much you need this does depend on your family and financial situation. I do want to share an easy guideline to follow when trying to figure out how much you need for your emergency fund.
|Situation Guideline||Number of Months for Emergency Fund|
|Starting an Emergency Fund||$1,000 – 1 Month of Bills|
|Single or Married w/ 2-Household Income||3-6 Months of Bills|
|Head of Household w/kids, Married w/ 1 Income w/kids||6-9 Months of Bills|
|Business Owner or Entrepreneur||9-12 Months of Bills|
Where do I save it?
The best place to save your emergency fund is in a high-yield online-only bank. Let’s break down the top two issues of placing your emergency fund in your big bank’s saving account.
- You’ll see it and spend it
- Earn pennies in interest
These are two very difficult rookie mistakes when it comes to emergency fund savings. The more you see it the more likely you will touch it. That is why the old saying of “out of sight and out of mind” works so well in finance. The other problem with having your money at a regular savings account is the low Annual Percentage Yield (APY) which is the interest earned. You can get a much higher yield if you save in an online-only bank due to the lower overhead costs those banks have. Using both of these tips together will help you secure your emergency fund from yourself and help grow it.
The best way to position yourself financially and through hard financial times is to have a safety net of cash. Having an emergency fund has built my financial confidence to start my own business and reduce my anxiety during hard times. The decision to save when others spent was a difficult thing to do, but when emergencies have hit I was able to handle them with poise. These are priceless emotions that are tied to having an emergency fund that I wish everyone would consider and value.
- How to Save Money by Avoiding Bank Fees
- The First Aid Kit for your Budget
- How to Stop Transfering Money Out of your Savings
- Emergency Fund: 2-Minute Q&A Tuesday
- Online Banks: 2-Minute Q&A Tuesday
- The First Aid Kit for your Budget Video