CHECK IN WITH THE EMERGENCY FUND

WHAT IS AN EMERGENCY FUND?

An emergency fund is an amount of money, typically in a separate bank account held aside specifically to cover major unexpected expenses such as:

• Short-term loss of a job or major reduction in income
• Major medical bill (for us or pets)
• Major home repair
• Appliance repair or replacement
• Major car repairs

It is meant to be a safety net to cover things that we were not able to realistically plan for.

MANY PEOPLE DO NOT HAVE AN EMERGENCY FUND

After a quick search, the first study that I found indicated that 26% of Americans have no emergency fund at all. I don’t know how accurate that is, but I was actually surprised that it would be that low, meaning that almost 75% do have an emergency fund. Just based on general conversations that I have with friends and family it seems like the number of those without an emergency fund would be much higher than 26%. The reason I am sharing this is that I think this topic is relevant to everyone whether you currently have an emergency fund or not.

I lived for many years without having an emergency fund. I might have had some small amounts of savings at times. But they always got used up whenever anything came up that we didn’t have money for. Whether you currently have an emergency fund or not, most of us can take action to start a small emergency fund or continue to grow an emergency fund that is not yet where we would like it to be.

HOW MUCH SHOULD YOU HAVE IN YOUR EMERGENCY FUND?

If you are trying to get out of debt, you will probably want to start with a small emergency fund. You can determine the amount that you decide makes the most sense for you. That might be maybe anywhere from $500 to a couple of thousand. This will allow you to continue to pay off your debt. At the same time, you will have a little cushion to cover unexpected expenses without having to go into further debt. Once you are out of debt, most say you should have about 3 to 6 months of expenses in your emergency fund. When you calculate the amount that represents 3 to 6 months of expenses it will likely seem like an overwhelming number. Don’t let that keep you from getting started. Set small goals and keep building it over time.  The more you have saved the better off you will be.

THINGS TO CONSIDER IN DECIDING HOW MUCH TO PUT IN YOUR EMERGENCY FUND

The most important thing to consider in determining how much to put in your emergency fund is your gut feeling. You have to be comfortable with how much you have in emergency savings. Some people are good with just the minimum amount they calculate out, and others feel better having a bit more. When we think about how much to have in an emergency fund there are some other things we want to consider. Do you or a family member have a medical issue that might require an occasional unexpected cost? Do you have an older vehicle that might need an expensive repair or need to be replaced? How stable is your current job? Is it likely that you could experience a job loss or a period of unemployment? When determining what your monthly expenses are, you want to make sure to cover things like:

• Housing
• Utilities
• Insurance premiums
• Cell phone (for communication)
• Transportation
• Food
• Minimum Debt Payments

Do not include things like:

• Cable TV
• Eating out
• Vacations / Travel
• Entertainment

While it would be great to include enough to cover those non-essentials, it’s hard enough to save up an emergency fund just to cover the essentials.  You can increase it to cover those things later if you are able to!

WHAT SHOULD NOT REALLY BE CONSIDERED AN EMERGENCY?

In a perfect world, there are some things we should try to be saving up for separately. We know they will be coming, so they are not really considered emergencies. However, sometimes, we do have to use the emergency fund for these things. But, in an ideal situation, we would want to have other savings to cover things like. Regular car maintenance that you know will be coming. Things like oil changes, tire rotation, new tires, and brakes. Well-care co-pays and recurring prescription medications. Annual vet care visits. Holiday expenses. Annual or semi-annual insurance bills. Annual membership fees (Costco, Amazon Prime, etc.).

BUDGETING HELPS

If you are not already budgeting your money, it might be a good idea to start. Even if it is only a very basic budget it will still help you in making sure you know where your money is going. Having a good budget will help prevent you from needing to pull funds from your emergency funds that are not really emergencies. For example, if your budget includes an amount allocated to regular car maintenance, it will not suddenly become an emergency when you realize you need to go get an oil change and tire rotation. The better handle we have on what expenses we need to make sure we have money for, the less likely it is that we will need to pull from our emergency savings.

HOW TO BUILD UP YOUR EMERGENCY FUND

Build into your budget amounts to deposit to your emergency savings on a regular basis. This might be each time you get paid or once a month. If your budget is too tight to dedicate any money to emergency fund savings really take a look to be certain that there is nothing you could potentially cut or reduce to make room for some emergency savings. Try to put any unexpected money that you might get into the account. This might be from something such as a tax refund or a bonus, birthday gifts, or Christmas gifts. You don’t have to put every dime away. But if you are mindful to put away at least a portion into your emergency fund you are still making progress. If you find you came in under budget on an expense, stick some or all of the difference in your emergency fund.

WHAT TYPE OF BANK ACCOUNT SHOULD YOUR EMERGENCY FUND BE HELD IN?

An emergency fund should be held in a regular checking or savings account that you can access relatively easily. One good account option to hold your emergency fund is a high-yield savings account. You can do some research online to look at the interest rates and minimum deposit requirements. Many of the banks have competitive interest rates with no minimum balances required.

DON’T DISCOUNT PUTTING SMALL AMOUNTS INTO AN EMERGENCY FUND

If you are unable to put what you consider a significant amount into a new or existing emergency fund do not let that stop you from making smaller contributions. If you end up needing money to cover costs related to an emergency, you will be glad to have some extra funds put aside no matter how small. Small amounts can really add up over time. So, while you may think the amounts you might have available are too little to even bother remind yourself that those little amounts will add up over time.

Often even just building the habit of saving those small amounts of money will make it more likely that you will put away larger amounts if and when they become available to you. When we are not practicing savings habits, we are not likely to save unexpected sums of money.  We can tend to figure out what to spend them on. But, if we are in the habit of saving when we can, we will be much more likely to consider saving rather than spending when we have the opportunity.

Thanks so much for checking in! If you would like to hear the podcast version of this topic check out Lola’s Frugal Life Podcast! Also, be sure to check out my other blog posts on this site!

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