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Best tips to start your emergency fund the right way
D’oh! The ole emergency fund rescued our financial life this week. My marathoner husband, Nick, broke his tibia at mile 12.5 and landed him in the emergency room. Breaking his bone didn’t disappoint him as much as having to pause his favorite hobby. Big bummer.
While the hope is for emergencies to be as infrequent as possible, they seem to happen when we least expect it. You run into the neighbor’s new car in the driveway. Or, your acrobatic daughter tries mimicking the TV gymnasts and breaks her arm. Or your basement floods and insurance won’t cover it.
Wouldn’t it be nice if when the next disaster happens, you have some extra money you can use? Give yourself a sense of calm during calamity? This post gives you all the information you need to set up an emergency fund in your life. Then Murphy’s Law will see you have an emergency fund and might decide to knock on someone else’s door.
What is an emergency fund?
An emergency fund is money you set aside to use whenever emergency strikes. This can be helpful when you’re navigating tough surprise situations. The last thing you want to worry about is if you can afford your bills while managing a difficult time.
As for how much you need, a good rule of thumb is save at least $1,000 if you have debt. If this doesn’t work for you, then that’s ok also. A nice, crisp 10 Benjamins will go much farther in Kansas than New York. Base your number on an amount that’s high enough to cover 1-2 big emergencies, but not so large to keep you comfy in debt.
Once you have your debt paid off, some money managers like to tell you to have 3-6 months’ worth of expenses. This varies based on a lot of variables. To do this yourself, look at your last 3-6 months worth of expenses by pulling your expenses from your bank. This will give you a good idea of what you would need to spend.
Some expenses you won’t want to forget are:
- Shelter and utilities
- Debts you must pay
- Obligated money via contracts
Every family calculates their emergency fund goal a different way. We don’t include luxury items. Our emergency fund is strictly for items we’d have to pay in case of an emergency and doesn’t factor in luxuries. Some families who want more cushion add 10% above whatever their basic estimate is. The point is to have only enough where you feel comfortable in case something happens. Then, with the rest of your cash you can crush your other money goals.
Why do you need an emergency fund?
Emergencies are bound to happen. Sometimes bad things happen to good people. Having some emergency money can turn an accident into an inconvenience. It can help get you back on track faster so you can get back to living the good life.
Many American women need emergency funds but do not have them. A 2016 study found almost 2 in 5 American women say they “probably or certainly could not pay for a $2,000 emergency.” Those numbers jump even higher if you earn $25,000 or less or are between ages 18 and 34.
This was me in college. I know what it feels like to feel kicked in the gut, have worry on overdrive and added money stress.
As a few examples of what I faced were:
My first marriage ended. Doctors diagnosed my dad with brain cancer, and he died in my junior year. One of my side jobs ended because of the poor 2012 economy. I had an undiagnosed medical problem and had to pay for two surgeries. My scholarship funds were reduced when I wasn’t prepared for it. My car had mechanical problems.
It was a LOT! It would have been so nice to have peace around money while my life was ablaze.
If you’ve experienced these, you could relate. And if you haven’t had a big emergency, you’re unusual! To live the human experience is to have the unexpected happen from time to time. Limiting the negative keeps you living a the good life and sends crazy elsewhere.
What emergency fund size is best?
Depending on your situation, the popular advice is to save $1,000 or three to six months’ worth of expenses.
On one hand, saving $1,000 is a great first step. But, it might not work for your situation depending on where you live. A nice crisp 10 Benjamins will go much further in Kansas than it would in New York.
My suggestion is to save up at least $1,000 if you have debt and more if you don’t. If you don’t feel at peace with $1,000, you can save more. It’s a good idea to have enough you can pay your bills for a while, but not too much that you’re too comfy. Too much cash uninvested can also be a problem!
We keep our emergency fund at $10,000 since we have no debt other than our mortgage. This leaves us enough room to pay for the unexpected but not too much that it could do better invested.
Where should I have my emergency fund?
Hold your emergency fund dollars at a bank you trust in a separate account from the others. It should be a very low risk, FDIC-insured bank account so you have access to it any time you need it. Another tip is to keep it accessible, but not too easy. You could even freeze the debit card in a big block in your freezer to reduce your temptation to spend it if needed.
Don’t be afraid to shop around your emergency fund account. Interest rates vary a lot between banks. Some banks, at this time of writing, are offering 1.90% which give you $15+ in your pocket each month. This is a lot better than some of the dreadfully low rates I’ve seen lately.
How do I save for an emergency fund?
There are only two ways to get more money into your life. You can cut your expenses. Or you can increase your income. Doing both are critical to seeing progress in your numbers. On a higher income and lower expenses, this gives room to save for your emergency fund. It also gives you more freedom to do what you want.
- Start a side hustle like blogging
- Sell stuff you don’t need
- Get $10 with Ebates and cash back for items you already buy online .
- Work extra hours at work
- Get a better paying job
- Use Honey (it’s 100% free) – they find great coupons so don’t overpay.
To cut your expenses, a few ideas are
- Make tasty but more affordable meals
- Get a roommate or move to a cheaper home
- Opt for thrift and save $300,000
- Bike or walk to work when possible
- Live as close to work as is affordable/cheap
Some like to set small savings goals which you can do through most banks by setting up auto transfer. I did this for a while but ended up doing it manually because I like having more control. It’s totes personal preference, though. I may just be a control freak. 😉
When is it ok to use an emergency fund?
- Job loss
- Death in the family
- Unexpected large emergency expenses
- Emergency costs insurance doesn’t cover
- Natural disasters
- Car accident
- Pet Emergency
- Child emergency
- Anything else you think is appropriate
What isn’t an emergency?
Usually, expected expenses are not emergencies. Factor those costs into your monthly budget if you can. Having the money saved up for those recurring events is a stress reliever.
Other examples of non-emergencies are
- Holidays, especially Christmas
- Regular car maintenance
- Home repairs, replacements or renovations
- Car replacement
- Normal pregnancy
The other important tip to share is some emergencies are smaller. If you can pay for it with cash without having to use your emergency fund, then you can do that. Not everyone can, but it’s a great option. Without debt, it’s easier to pay for surprises because you have more money.
What happens after I use my emergency fund?
Some billers will let you make smaller payments. I did this with a medical bill I had I couldn’t afford to pay in full once. They did not charge interest to do this. If you’re upfront about your financial situation, they are more likely to work with you than if you don’t pay. You’ll want to avoid having bills sent to collections at all costs. This can cause major financial problems and add to your stress.
When the crisis is over and you have a second to breathe, make a plan to restock your emergency fund. If that means putting debt payoff goals on hold, then that’s ok. Having those dollars available will help keep your momentum in the hard times.
What’s the No. 1 emergency fund mistake to avoid?
We made the mistake of keeping our emergency fund higher than we would have liked and also at a low-interest paying bank. If I had a do-over, I would have kept tabs on our numbers and used the extra to pay our debt sooner.
On the other hand, if a major life change happens like a new marriage or child, you’ll want to adjust then, too. The amount you have in your emergency fund should stay in pace with whatever is happening in your life.
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