If you don’t have an emergency fund, you can pretty much bank on an emergency! As soon as you finish reading this article start planning on how you can start funding one!
As you know there are thousands of financial advisers and experts on TV, radio and the internet and almost all of them will agree on one thing, you need an emergency fund! One of my favorite theory’s about an emergency fund comes from Dave Ramsey. Ramsey suggests having $1,000 in an emergency fund while you are getting out of debt. Once you are debt-free you should start pouring money into an emergency fund until you have 3-6 months of your income saved.
Why do you need an emergency fund?
Unfortunately, life doesn’t always happen as we plan. There are unforeseen expenses that tend to always pop up, and usually they at the worst times possible. If you don’t have the cash to take care of them, the typical American will throw the expense on a credit card and plan to pay it off over the next several months. But what happens when another emergency pops up while trying to pay off the first emergency? As you can see it can be pretty easy to start racking up some pretty hefty debt. If you have a fund in place to cover emergencies you’ll rest a lot easier at night.
What constitutes and emergency?
Not Emergency: buying a new car because your old car needs a new alternator
Emergency: pulling a few hundred dollars to fix the broken alternator so you can get to work
Not Emergency: Pulling a week’s pay out of the emergency fund so you can take a week’s vacation from work unpaid.
Emergency: You lost your job and need to pay for NECESSARY expenses until you can find a new one.
Other emergency’s could include: covering your living costs during periods of unemployment, medical emergencies, paying for repairs to your home that occur as a result of a natural disaster or fire, unforeseen vehicle repairs, or even tax bills that were unexpected.
You get the idea. The only reason you should ever pull money from the emergency fund is for something that is absolutely needed to survive. Then you should immediately focus on putting that money back into the account.
How and when to start
If you don’t already have one, now is the time to start. Getting started can be as easy as transferring $10 per paycheck into an account other than your regular checking account. This money should be pretty easily accessible but not too easy. You don’t want to keep it under the mattress, but you also don’t want to have it tied up in the stock market.
How much do you really need?
This will vary greatly depending on everyone’s situation; however as mentioned above 3-6 months of living expenses is a good place to start. This may actually be a smaller amount than you initially think. You just need to “get by” for those months while you find a new job or rebuild the emergency fund. You will want to be able to pay all your bills, keep the electric on and have basic food and water. You won’t be eating out or buying a buying a bunch of luxury items during this time.
Stick to it
Just like any other goal you have to stick with it. Always think about the final goal. Consistently deposit funds into the account until you reach the magic number. Once you reach your goal you will realize you’ve never missed the contributions. This would be a great way to up your retirement savings, etc.
In Conclusion
At first it may seem challenging or even pointless to work so hard to build an emergency fund. However, when you have several thousand dollars sitting around in the bank you will quickly realize emergencies don’t pop up as often as they once did.