Emergency Fund 101: Why You Need One5 min read

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Emergency Fund 101

We all know that we should have some savings on hand in order to give ourselves margin and put a gap between us and our problems. The bigger our emergency fund, the better prepared we are if something is to happen that is not budgeted for and can’t wait to be put into the budget.

Emergencies include, but are not limited to:

  • Furnace going out in the dead of winter
  • Having to fix your car because something went wrong like the transmission went out
  • The roof starts leaking
  • Emergency visit to the hospital

These are things that happen, but we can’t really forecast when they will happen because they don’t happen at regular intervals. A good emergency fund allows you to take some of the frustration out of the experience when it happens because then you won’t have to worry about where the money is going to come from.

Let’s dive into the reasons you need an emergency fund:

How Big Should Your Emergency Fund Be?

Everyone will differ on the amount, but Dave Ramsey recommends between 3 and 6 months of expenses. I agree with him and we tend to lean towards the 6 month side. By putting money aside at these levels, you are not really doing anything with the money but protecting yourself, but you are going to have that money when you need it. I think when determining how big you want your emergency fund to be, you should talk to your spouse and try to come up with a good number that you can both agree on. Some people might be happy with having about $10,000 in the bank to cover a catastrophe, and then there’s people out there that would be happier going heavier.

Some things that will change the amount of your emergency fund are:

  • Pay Raises
  • Change in lifestyle (positive or negative)
  • Kids

We actually have a goal of $15,000 for ours and are getting closer each month to get it fully funded.

Why You Need an Emergency Fund?

The main reason to have an emergency fund is due to a sudden loss of income. If you are a two income family, it’s not so bad, but the loss of a job is still a hardship on the budget. Not to mention, more than likely, you are not able to sustain your lifestyle for an extended period of time without your full income. An emergency fund will allow you to provide yourself a little bit of margin in the event that something like a job loss occurs. This will afford you to keep on paying your bills and hunt for a new job without being too desperate and taking the first thing that comes along.

Another reason is so that you can easily handle the smaller emergencies that come up like car repairs or having to replace the hot water heater. Another one would be that someone close to you passes away and you have to book that last minute trip to get out to the funeral. You wouldn’t want to have to give the excuse of “I can’t afford this”. And this also allows you to keep that pesky credit card from coming out and putting you into debt again.

Where Should I Keep the Emergency Fund

Emergency funds are like insurance, not investments.

They aren’t there to make you money, they are there to save you money.

I know that when you are looking at a pile of money like a fully funded emergency fund, you will probably think at some point, “That money could be doing so much more for me”. But, I urge you to just keep it in a savings account or a money market account that you have quick access to. The whole reason to have this in a liquid place is because you don’t know when you are going to need the money to fill an emergency.

We actually keep ours in an online savings money market account. It earns a little bit of interest each month and we don’t pay a dime in fees to have it just sit there and protect us. We don’t have any debit/credit cards attached to them nor checks. We just transfer the money in, it takes about a day, if we need it. This allows us to make sure that we keep our hands off of it most of the time, since it’s not as readily available.

Questions to Ask Before Using Your Emergency Fund

1. Is it unexpected? Isn’t it funny? Life is always throwing us curve balls. Things like job loss, natural disaster, or insurance deductibles are unexpected expenses that you will want to use your emergency fund for.

However, expenses that occur normally; Christmas, school supplies, normal car repairs (thinking tires and licence registration here), and yearly association dues are something that you can easily setup a sinking fund to cover.

2. Is it absolutely necessary? Think about the difference between needs and wants. Make sure that you absolutely need to get it done before forking over the funds to do it. Replacing the windows in your house just because they are not looking the greatest versus the windows are not sealing and every time it rains, water is leaking in is an example of a need versus a want. Don’t let this deter you from having nice things, just be sure to setup a separate fund to start saving for it when you have the ability to do so.

3. Is it urgent? Immediate needs such as medical visits and home repairs that you can’t live without are sometimes hard to figure out without freaking out. We’ve all had an emergency and without an emergency fund, it adds so much more stress to the situation. With an emergency fund, Dave Ramsey says that you should “Focus on the task at hand and leave the rest up to your emergency fund.”

I Used My Emergency Fund, Now What?

In the event that you actually need to use your emergency fund, don’t stress about it. Remember why you created the fund in the first place, to cover emergencies! But, after getting through the emergency, you will need to focus on rebuilding the fund back up before moving forward so that you will be ready to handle whatever curve ball life throws your way next time.

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Steven Goodwin

Owner/Blogger/Consultant at MyFamilyOnABudget
Steve Goodwin, a stay-at-home dad of two girls is passionate about finances and is helping others just like you get out of debt and build wealth handling money God's way. His goal is to inspire people like you to gain control of their finances by destroying debt and building wealth using their cash flow.
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