Chefette&Little What is It? Do I Need One? How do I Start One? If You Have Ever Asked Any of These Questions This Post is for You!
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In the personal finance world there seems to be a lot of debate about the concept of the “Emergency Fund.” It seems that everyone agrees that you should have one but that’s where the agreement seems to end. There is much debate about how much should be saved in this fund, where it should be stored, if you should prioritize saving to one if you have current debt, and what it should be used for i.e. what actually constitues an emergency.
What Is an Emergency Fund?
Defined simply an emergency fund is a dedicated savings account that is there for you when you have an unexpected emergency arise, aka when life starts lifeing. This fund could cover bills during a period after an unexpected job loss, a major unplanned car or house repair or even sudden urgent medical needs.
These funds are important as no one can truly expect an emergency, they can help you continue to meet basic needs during a turbulent time. With an established emergency fund you are better prepared for these unexpected life events when they come up which is very reassursing and unfortunately isn’t currently possible for a lot of Americans. According to data from the Federal Reserve from 2022, 37% of Americans are unable to cover an unexpected cost of $400 or more without relying on credit cards or other loan types, among parents this number increases to 43%. Unless you’ve been living under a rock you know that most emergent expenses weather it be an unplanned car breakdown or HVAC repair cost much more than $400.
How Much Should I Have in my Emergency Fund?
Ideally you should aim to have 3-6 months of expenses set aside in your dedicated emergency fund account. I know, I know this sounds like a lot and can seem really overwhelming, but if you have an unepxected job loss or medical emergency which makes you unable to work for a short period of time having this buffer is essential. Some financial experts will tell you that if you currently have debt paying this off should be your only priority. They recommend having a starter emergency fund of $1000 and after you’ve reached this goal all of your focus should be on debt repayment. While some say that saving this 3-6 month buffer should be the first priority (while continuing minimum payments on all debts) and once you’ve acheived that goal you should transition focus to paying off your debt. Others choose to have a dedicated emergency fund that is really and truly only to cover regular life expenses in the case of a job loss or inability to work, and then also save to sinking funds which are savings accounts dedicated soley to cover likely upcoming expenses such as a vehicle sinking fund, holiday fund, or pet fund. These dedicated funds would cover regular maintenace on your vehicle or vet visits but also could cover an unplanned emergency that arose in this category as well. A blog post more about sinking funds, how to use them, where they should be stored, etc coming so stay tuned!
So as you can see there are several different approaches that you can take towards an emergency fund. My best recommendation is to do what you think makes the most sense for you, as Tori from Her First 100K likes to say “personal finance is personal” and of course it depends on what other goals you have for yourself and your money. If you have a significant amount of debt and it is causing significant stress and anixety it may make the most sense for you to set aside more of a “starter” emergency fund of $1000 and then focus on debt repayment as your main priority. If you are more concerned with being prepared for the future and want the peace of mind of being covered in a true to form emergency focusing first on building the recommended 3-6 months worth of expenses emergency fund will likely be where you should start. Alternately you could take a combo approach, focus on building that $1000 starter fund and then shift your primary focus to debt repayment but also continue to save towards your emergency fund. This could look like automating 10% of your take home pay towards your emergency fund or throwing any unexpected money gains (a work bonus, selling that old mountain bike you never use on Facebook Marketplace, etc) into your emergency fund rather than also at your debt. You know yourself best if paying off debt and saving at the same is way too much for your brain to focus on then pick whether or not you want to save your full funded emergency fund first or save your starter fund and shift towards debt repayment. If you don’t currently have any debt (you go Glen Coco) than your first priority should be building a fully funded emergency fund of 3-6 months of expenses.
How Do I Build My Emergency Fund?
Starting to build an emergency fund from scratch can feel really overwhelming, 3-6 months of expenses is a lot of money, honestly so is $1000! The hardest part of saving to this fund is getting started! After you’ve determined which approach you will take for saving your emergency fund you need to work on setting a budget. I have a previous blog post all about where to start with setting a monthly budget including doing a reverse budget, etc, check it out here! I also have a free monthly budget template here if you’re looking for a good one to use-the blog post covers how to use it!
Many people feel that they cannot save as there isn’t anything left to contribute towards savings after bills are paid, which I completely understand and empathsize with, sometimes this really is the case. But often once you’ve set a realistic budget for yourself, and are tracking your spending you will actually find some wiggle room and may have an extra $20 that you can add to your emergency fund each month, even small contributions add up. Maybe you have some clothes that you aren’t wearing anymore and you could resell these at a consignment store or through an online selling site like Mercari or Poshmark and put anything made this way into your emergency fund. In addition to these methods if you find after completing a budget that you can commit to saving a set amount each month set this up as an automatic transfer. Think of it as another bill but to your future self, and pay yourself first. If this money is out of sight out of mind safely tucked away in your emergency fund account you’ll be much less likely to impulsively spend it!
Remember Rome wasn’t built in a day and neither will your emergency fund, the goal is to be contributing to it regularly and to begin to change your habits to better support your overall financial goals in the longterm!
Where Should I Store My Emergency Fund?
I recommend that your emergency fund be stored in a High Yield Savings account. A good reference comparing some common HYSA here. Many people choose to keep a small portion of their emergency fund in a savings account that is connected with their checking account so it’s able to be accessed urgently in a true emergency, but keep the bulk of the fund in a HYSA for the better interest earnings over time. I think this is an excellent strategy, remember this fund is intended to cover you during times of emergency i.e. job loss, serious medical illness, etc, having some delay in transferring the funds from one bank to another could help you from using these funds in ways other than intended!
Final Thoughts/To Dos
- You need an emergency fund! Best rule of thumb is to have 3-6 months of living expenses saved up in this fund to cover you in case of a true emergency. If you have other financial goals that you want to prioritize first consider a starter emergency fund of $1000 but I would recommend continuing to save while still prioritizing other goals if at all possible. Either way decide which approach you’re going to take and get started!
- Automate your savings, sell items you don’t need, and set a realistic budget for yourself to find extra money to contribute towards your savings goals. The goal is to set your future self up for success, by changing your habits to better support your financial goals!
- Utilize a HYSA to store the bulk of your emergency fund, if you want to keep a small portion in a savings account connected with your checking account for quicker access if an emergency arises, that is fine but prioritize most of it being in a HYSA for the higher interst earnings!
Conclusion
So far in this budgeting series we’ve covered the importance of a monthly budget, setting up your monthly budget, developing a debt payoff plan and now building your emergency fund. Next we will cover sinking funds, what they are, how to use them, etc so stay tuned for that in an upcoming blog post! Let me know in the comments below if you’ve found this helpful and/or if you think I missed any important steps in this phase!!!
