An Emergency Fund Will Prepare You for the Unexpected

An Emergency Fund Will Prepare You for the Unexpected

Kim Pinnelli

by Kim Pinnelli
Senior Contributing Writer

January 17, 2020
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An Emergency Fund Will Prepare You for the Unexpected

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You need an emergency fund to help pay for those unexpected expenses that can cause financial ruin.

Do you live paycheck to paycheck, fearing anything that could go wrong and force you to deal with unexpected expenses? Are you worried about how you'd pay those expenses?

An emergency fund is one of the best ways to address this concern. With money set aside, you can rest assured knowing that you'll have a safety net to help you weather an unexpected setback without putting yourself into debt.

It takes time to build an emergency fund, but it's an important asset that everyone should have.

This fund should be separate from all other funds, especially your checking account that you normally use for spending.

Many things that an emergency fund might cover can be protected with insurance, but it's always a good idea to have cash available for unforeseen expenses that might not be covered.

People use emergency funds for all types of things, including sudden medical expenses, missing work due to an illness, car repairs, and home repairs, just to name a few.

How Much Should You Save?

Ultimately, you should have three to six months of expenses saved in an emergency fund. If your normal monthly expenses are $3,000, for example, you should aim to save between $9,000 and $18,000 in your fund. You don't have to have that amount right away – it's just a goal to try to build towards, but any amount you can save may help you down the road.

At the very least, start by trying to save up $1,000. While that's not going to cover a major emergency completely, it's great a start. Once you reach $1,000, you can then set another achievable goal according to your financial abilities to save, helping you reach your goal of three to six months' of expenses eventually.

How to Start an Emergency Fund

If you are starting from scratch, you may find yourself wondering where you even start. Don't try to bite off more than you can chew, if saving $1,000 seems impossible, aim for $500 or even $200 if that makes it more manageable.

Even if you can only save a little right now, that's okay – it's a start. Every dollar you save today is a step towards your goal.

If you aren't sure how much you can save, take a look at your budget. Do you have room for savings? If it's not even a line item on your budget, make it one just as you would with any other fixed expense. It doesn't matter if you set aside $5 or $500; just make it a part of your budget.

You can always work up from there – the key is to start, and the motivation will continue to grow as your account balance grows.

Where Should You Keep Your Emergency Fund?

Now it's time to figure out where you should keep your emergency fund. Again, whether it's $5 or $500, you need to put it somewhere that is separate from your spending account. If you co-mingle your funds, there's a good chance you'll unknowingly spend your savings by accident.

A few things to keep in mind:

  • The funds should be liquid. Don't put the money in an account that you can't access quickly or that will incur a penalty if you access them too soon. This rules out things like a Certificate of Deposit.
  • The funds should be safe. While earning interest on your money is ideal, if you have to risk its safety, you may find yourself without the funds you need when you need them. Stick with a boring savings or money market account.
  • The funds should be insured. Ideally, your funds should reside in an account that is FDIC insured. If you want to earn higher interest rates than your local bank offers on savings accounts, consider a high-yield savings or checking account, or a money market account online.

Finding Ways to Add to Your Emergency Fund

Even when it feels like you'll never be able to add to your emergency fund, especially if you live paycheck to paycheck, there are always ways:

  • Set up a recurring, automatic deposit from your paycheck directly into your new emergency fund savings account. Even if it's only a few dollars, it adds up, especially when it's on autopilot.
  • Bank all windfalls. If you get a tax refund, unexpected bonus at work, or you earn money through a side hustle, put the funds right in your emergency fund. When it's out of sight, you are less likely to spend it needlessly.
  • Start a side gig. If you live paycheck-to-paycheck, find a side gig either online or in-person that you can do to bring in some extra cash.
  • Cut down your bills. Be honest with yourself as you go through your bank statements. Where do you spend that you don't need to or what services can you cut down? There are always ways to cut down and save a few dollars or more. Services like Truebill can help you track down recurring expenses you may have forgotten about. You should also consider renegotiating your existing bills, even if you have to get creative.

When Should you Use an Emergency Fund

Once you have taken the time and effort necessary to save up for your emergency fund, deciding whether to use it is another matter. As the name suggests, you should only use it in real emergencies. Finding out that you don't have enough to pay a predictable annual bill isn't an emergency. Examples of true emergencies are unexpected medical bills, car repair bills, or covering your living expenses because you lost your job. Any expense that cannot be avoided, and risks putting you in debt, should be absorbed by your emergency fund.

Things To Avoid Using Your Emergency Funds On

  • One-time expenses that you knew about but didn't save for
  • Regular monthly expenses (unless you lost your job)
  • Predictable expenses that should be expected periodically like car maintenance or real estate taxes (these should be their own line item on your monthly budget).

If you don't have an emergency fund, now is the time to start. You don't have to be rich or have a lot of extra money each month. You simply need the motivation to start somewhere. Once you see your money start growing, you'll be motivated to keep it going. When you have money saved for a rainy day, you'll also experience less stress. You don't have to lose sleep at night wondering how you'll cover a major catastrophe – you'll know that you have yourself covered.

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