The Ultimate Guide to Emergency Funds

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When I first started paying off debt, I didn’t want an emergency fund. I wanted to jump straight into paying off debt instead! “Emergencies never happen to me, so why do I need one.”  That mindset is totally wrong, because as soon as you don’t have your emergency fund, you will need it. I am so thankful that I have maintained my savings throughout the journey because I know that I would have needed it.

Having a little rainy day fund can be the most important part of getting started on changing your finances for the better. It can also give you a sense of security when your checking account is looking a little low from a large debt payment. In fact, having an emergency fund was one of the biggest things that I credit with allowing me to pay off $15,000 in 2017. At that point in my journey, I was only making about $35,000 a year, but still managed to knock out $15,000 in car payments and student loans..

Let’s start with the very basics. I will caution you with this, if you share finances with someone, this is a topic that both of you should figure out before making any long term financial decisions.

What is an Emergency Fund?

An emergency fund is really exactly what it sounds like. Extra savings put aside in case of an emergency. Before you start throwing excess money at your debt, it is a great idea to have money in savings to work as a buffer in case something were to happen.

If you are following Dave Ramsey’s Plan, he recommends starting with a “baby emergency fund” and then moving into a “fully funded emergency fund” once you have paid off all of your debts. Whether you are following Mr. Ramsey or not, having a little money set aside, just in case is an important step no matter what you are planning to do after that!

What is Included as an “Emergency?”

This is totally up to you (and your partner if you share a budget with someone else.) Things that I have seen for emergencies include car maintenance, unplanned doctors/vet visits, unplanned bills or unexpected expenses. It could be as serious as the temporary loss of a job or needing to take time off. In January, I lost one of my temporary jobs due to budget cuts. While I was lucky that I had my second job that I picked up hours, that emergency fund would have been vital if I needed to pay a few bills for a while.

Mostly, the emergency fund is set for things that you didn’t think you would have to spend money on when you needed it. Every family has a different definition of emergency, but you will have to define your own. Also, when something comes up, you will have to decide whether it is truly an emergency or just an inconvenience. Some things you can probably live without. Others are things that need to be taken care of immediately. It is ultimately up to you which is which.

How Much Should You Have?

I usually recommend a starting point of $1000 or one month’s expenses. It can be tricky, because if you have never kept $200 in savings for a long period of time, $1000 feels like such a mental hurdle, but it is so important to yourself to prove that you can do it!

I truly believe that everyone’s emergency fund is going to look different based on your goals and your life. Here are a few things to consider when setting your emergency fund goal.

• Own your home vs renting?

• A longer daily driving commute (more reliant on car than working from home)

• Have kids?

• Have a pre-existing health condition that you may need to prepare for? Insurance deductible?

• How much wiggle room do you have in your monthly budget to cover an emergency if one came up?

• Pets?

If you said no to the first three categories, you might be able to lower the amount. I personally started my emergency fund with $1000 but after a full year of not touching my emergency fund at all, I lowered it to $500 instead. I didn’t own my home while paying off debt, so I don’t pay for any maintenance at my apartment. If something were to happen, it would be on the rental company to fix it. I also don’t have kids, which can create extra expenses in a budget. Even at $500, I can comfortably cash flow most of my unplanned expenses. I am easily throwing $1000 towards debt every month, so if I were to have an emergency, I could cover it by just lowering my monthly student loan snowball.

All of these are things to consider when you are planning your emergency fund. It is safe to start at $1000 and add or lower as needed. If you are going to lower it from $1000, I would recommend keeping it higher for at least a year. If your baby step two is going to take more than one year, that is the time to consider lowering it and throwing that excess money at debt instead of savings.

Maybe you are already debt free! If you are already out of consumer/student loan debt, 3-6 months of expenses is recommended to keep in savings. The average time that people are laid off of work (if it happens) is about 6 months (And this is increasing). If you work in a career field that isn’t as secure, you might want it a little higher. Every family is just a little different, so take some time to decide what is best for you.

My 3-6 Months emergency fund, or fully funded emergency fund goal amount is $10,000.

Where should I keep it?

You can really keep it at any bank, but you want it to be easily accessible. You want to be able to get it it in case of an emergency.  I also don’t recommend having a bank account that has a “minimum balance required” because if you have to use your emergency fund, you might end up paying a penalty fee for using your money. While you want your account easily accessible, you don’t want it to be too easy to get to. Keeping it at the same bank as your normal checking account an create a false sense of available money. I recommend having it at a totally different bank thank your daily use accounts.

I use Ally Bank. I like that it is online and it is harder to access on a daily basis.  I can’t use it for impulse purchases and it requires some thought and effort. Ally does have a “bucket” feature that allows you to have multiple different spending goals in one account, which is a huge perk if you are also working on some sinking funds.

Keep in mind, regardless of interest rates, this savings is not there to help build your money. It is not an investment account, so make sure that you can still get money into and out of it. But don’t stress too much about the interest rates. You can read more about all of my different bank accounts in this blog post. I personally have 5 bank accounts that have different purposes, plus one business checking account.

How to build your Emergency Fund quickly

Now, $1000 may seem like a lot. Especially if you are living pretty much paycheck to paycheck like almost 80% of the United States is currently doing. But there are a few ways to get the ball at least rolling to get the where you need to be. First, open up your high yield savings (again, I like Ally) and deposit any savings you already have. I challenge you to find a way to get to at least $250 in the first week. This will create a solid base to start with.

Cut back on eating out for one month! You might be surprised how much you are spending on food, drinks, and fun.

Check out my related posts:

• 13 Ways to Avoid Fast Food
• 6 Foods to Keep at Home to Eat Out Less
• How I spend less than $200 on food
• How I use this marker board to create a meal plan

Maybe it isn’t eating out, maybe it is your grocery bill. Check out my number one secret to saving money on groceries.

Do a “No Spend Month”  and see where you are spending in excess. I host no spend months every few months over on my e-mail list, so you don’t want to miss out on that!

Check out your daily expenses. Often it isn’t the big bills it is the little purchases that are killing your budget.

If you haven’t ever set up a budget, check out my very basic guide to changing your finances.

Start tracking your expenses and using cash envelopes for purchases.

 

Are you going to take the first steps to getting an emergency fund?

After being on this debt free journey for over a year, I am thankful that I have had my emergency fund as a back up fund. Even if you aren’t aggressively paying down debt, having an emergency fund is so important to being secure in your finances.