Why You Need An Emergency Fund – How To Start An Emergency Fund

Do you want to learn how to build an emergency fund?

I recently asked you, my readers, what you want to read about right now. The majority of you told me that you’d like to learn more about emergency funds.

In today’s blog post, I answer questions such as:

• What is an emergency fund?
• Should you have an emergency fund if you are in debt?
• How much should be in an emergency fund?
• Where should you keep your emergency fund?
• Should I keep my emergency fund in a separate account?
• Can’t I just use my credit card as my emergency fund?
• How can I save enough money for my emergency fund?

Thinking about how you would handle certain life situations is exactly why today’s post about emergency funds is so important.

See, an emergency fund is something I believe everyone should have. However, many people skip this important part of managing their finances.

Without an emergency fund, you can take on debt, add to your debt, not be able to afford basic living expenses, and more. It can be very scary to live without some emergency savings.

So, why are emergency funds important overall?

There are many reasons for why you should have a fully-funded emergency fund:

• An emergency fund can help you if you lose your job. No matter how stable you think your job is, there is always a chance that something could happen where you may need money. What would you do if you lost your job and didn’t have an emergency fund?
• An emergency fund is wise if you do not have great health insurance. You may have a medical emergency come up, and you can easily spend hundreds or thousands of dollars out of pocket.
• An emergency fund is a good idea if you have a car. You just never know if it may need a repair.
• An emergency fund is a need if you own a home. One of the lucky things that homeowners often get to deal with is an unexpected home repair. Having an emergency fund can help you if your basement floods, if a hole in your roof forms, and more.

An emergency fund can protect you in many other areas as well. This can include if you have an unexpected medical expense for your pet, if you have to take time off work for something, you need to go somewhere far to visit someone who is sick, and so on. The list of reasons for why you might need an emergency fund can be a long one.

Emergency funds are always good to have because they give you peace of mind if anything costly were to happen in your life.

Instead of adding to your stress because of whatever has happened, at least you know you can afford to pay your bills and worry about more important things.

Today, I’ll be explaining more about what an emergency fund is, if you should have one if you are in debt, how much money should be in your emergency fund, and where you should keep it.

Related content on how to start an emergency fund:

How to start an emergency fund.

 

What is an emergency fund?

An emergency fund is money that you have saved for when something unexpected happens.

This can be something such as paying for bills if you lose your job (or if your hours or pay are cut), paying for a car repair, a medical bill, or something like a broken window.

What’s not an emergency? An emergency is not a birthday present, a new TV, a vacation, and so on. Your emergency savings fund is meant to cover essential spending when something unexpected happens.

An emergency fund is wise to have because it can help prevent unnecessary debt. There are too many people out there who count on their credit cards as their emergency fund, and that is not a good idea. This can lead to spiraling out of control with your debt because of high interest rates.

 

Should you have an emergency fund if you are in debt?

Yes!

There are many reasons why you need an emergency fund, and debt may be one of them.

I definitely still believe that you should have an emergency fund even if you have debt. If you have debt, then the recommended amount is to have at least $1,000 in your emergency fund before you start paying down your debt.

After that amount, you need to determine what you are comfortable with.

The reason you still want to have an emergency fund while you’re in debt is because it protects you from taking on more debt, and it will help you to continue making your debt payments if something happens. 

You have been working so hard to get out of debt, and an emergency fund can help you stay on track.

 

How much should be in an emergency fund? Emergency fund calculator.

The next question I often hear is “How much should be in an emergency fund?” 

The recommended emergency fund amount is dependent on your specific situation. There’s no average emergency fund amount that will work for everyone. 

If you don’t have debt, then I usually recommend at least three to six months of expenses. And yes, that’s expenses, not income.

However, some people save as much as a full year of expenses in their emergency fund. A 12 month emergency fund might sound like a lot to you, but it all depends on your situation.

Here are some of the things you will want to think about when determining how much you should save in your emergency fund:

• The stability of your job – If you are self employed, work on contract, or in a changing field, you may need a larger emergency fund.
• Your income when compared to your expenses – If you have a lot of expenses, you will need more in your emergency fund. But, someone who has no credit card debt, mortgage, student loans, or car loans, will likely need less in their emergency fund.
• Whether or not you own a house and/or car – You will need more on hand if something were to break, need repaired, etc.
• Your health – A healthy person is less likely to have expensive medical bills than someone who has preexisting conditions, is a smoker, etc.

Basically, the “riskier” your situation, the larger your emergency fund should be.

You’re the best gauge for determining what is a good or risky financial situation, but you need to be realistic and realize that what may work for one person may not necessarily mean that it will work for you.

For us, I like to have one year of expenses saved since we are self-employed, and for a few other reasons. 

But, I know many people who are comfortable with a 6 month emergency fund. 

While the average person should have three to six months worth of expenses, it’s important to analyze your specific situation and pick the right amount for you.

I think the average person should definitely have some sort of emergency fund. Even if you can only manage $500 to $1,000 right now, that is better than nothing. $500 to $1,000 may not cover the entire cost of your emergency, but it will at least help you a little bit. Plus, you can still put money towards high-interest rate debt after you build up your specific emergency fund amount.

Note: On top of an emergency fund, I also recommend having an emergency binder. I recommend checking out the In Case of Emergency Binder to help you with creating your own emergency binder. This is a 100+ page fillable PDF workbook. There are 14 sections that go over key personal documents, household information, medical information, insurance policies, and more.

 

Where should you keep your emergency fund?

You may be wondering where you should put your emergency fund.

Your emergency fund is there so that when you need money fast, you can use it.

Due to this, you will want to put your money in a place where you can easily take it out. This means you do not want to be penalized for taking the money out. And, you probably don’t want to invest it in a high risk investment (such as the stock market) as you don’t want to lose what you’ve saved for emergencies.

I prefer keeping an emergency fund in a high yield savings account so that you are still earning a little bit of interest, without any work.

High yield savings accounts are a great way to grow your savings, but most people have their money in accounts with low rates. Unfortunately, that means many of you are losing out on some easy cash!

With Betterment Everyday, you can start earning 0.30% with a balance as low as $0.01.

How does that compare to the national average savings rate? It’s a very sad 0.09%. That is a HUGE difference from what Betterment Everyday is offering. If you are only getting 0.09%, then you are losing out on easy, passive money.

Savings accounts at brick and mortar banks are known for having really low interest rates. That’s because they have a much higher overhead – paying for the building, paying the tellers, etc. Betterment Everyday is an online option, which means they have lower costs, then passing the savings on to you.

To get started and open a Betterment Everyday account:

1. Signing up is super easy. Simply click here and sign up.

See, super easy!

Read more at How To Earn Over 20x The National Savings Rate.

 

Should I keep my emergency fund in a separate account?

You don’t want your emergency fund to be too easy to get to.

This is because it would then be too easy to spend it. Due to this, I recommend keeping your emergency fund in a different account from your normal spending bank account.

Some people may simply open up a different account at their same bank, whereas others may go to a completely different bank to keep their emergency fund.

This is another situation when you need to do what’s best for you. You may be the kind of person who needs some barrier to getting into your emergency fund, and that’s okay. I would rather you know that about yourself than risk spending your emergency fund on something it’s not meant for.

 

Can’t I just use my credit card as my emergency fund?

There’s a growing number of people who are looking to their credit card as their emergency fund. Some are doing it by choice, and others are forced to use their credit card when an emergency comes up because they do not have enough money saved.

This is something that scares me. While credit cards may work for some, I believe that a more traditional emergency savings fund is a better solution for the average person. 

If your situation is quite risky, then using a credit card for your emergency fund may be a bad idea. This is because there is a large chance you may rack up credit card debt that you are unable to pay off whenever an emergency arises.

By relying entirely on a credit card emergency fund, you are going to be taking on a lot of risk.

You never know if something may come up, how big the expense may be, and whether or not you will have a large enough credit limit to fund the expense.

Plus, the interest rate on your credit card may hover somewhere near 20% or more, which can make for an expensive bill if you are unable to pay your credit card balance before interest accrues.

There are situations where using a credit card for your emergency savings fund may not be a completely bad idea. If you know that you can pay off a large expense within one month, then using your credit card as an emergency may not be a bad idea, but you still need to be careful before adding any debt. 

See, the problem with this thinking is what happens if you lose your job? Many people have emergency funds so that they can support themselves if they were to lose their job. What would happen if you relied on credit cards but lost your main source of income?

This could lead to a lot of credit card debt. Unmanageable credit card debt…

My problem with using credit cards as your sole source for an emergency fund is that, in some situations, it may lead to more debt. Sure, some people can use their credit cards to their advantage, but the average person most likely needs a real emergency fund that they can count on.

My point here is to be honest with yourself so that you can prevent yourself from adding any debt and being in an even worse situation.

 

How can I save enough money to fully fund my emergency fund?

After reading all of the above, I bet you cannot wait to start your own emergency fund 🙂

Building an emergency fund may be hard in the beginning, but everyone has to start somewhere. And even though it’s hard, you will be happy that you’re prepared for when you need money fast.

If you want to start an emergency fund, I recommend that you start by opening up a separate account to save in. 

Then, here are different ways you can start building an emergency fund:

• Use your tax refund
• Set aside a certain amount out of each paycheck – Many employers will help you set up auto deposits into a separate account for your emergency fund. 
• Find ways to make extra money – Here are over 100 different ways to make extra money
• Start a savings challenge – The $20 Savings Challenge is a great way to easily save $1,040 this year without noticing! All you have to do is save $20 each week for a year, and then you’ll easily have $1,040. If you start this now and do it just until the holidays, you will have a nice chunk of change as well! You can get the free printable here.
• Use a micro-savings app like Qapital – You can set triggers for saving, like when you post a status update to Facebook, when the space station flies over your house, etc. You can also set automatic deposits, do round-ups, and more.
• Cut your expenses and put the extra to your emergency fund

 

Is a $1,000 emergency fund enough?

A $1,000 emergency fund is a great place to start if you do not have one yet.

Eventually, though, you will most likely want to continue to build on that as described above.

 

If you are just starting, don’t fret.

If you’re just starting to build your emergency fund, it’s easy to feel like you’re never going to have the recommended emergency fund amount. But, don’t feel like you are being defeated. 

Everyone has to start somewhere. $100 in your emergency fund this month will grow, and soon you will have saved $500, then $1,000. That’s MUCH better than having nothing. Then, once you have that saved, you can continue to add to it.

Most people find that starting is the hardest part, but that it grows faster once they start saving more and more. I think that’s because you see your progress, and do everything possible to keep money saved.

 

Do you really need an emergency fund?

Yes, you really do need an emergency fund! As you learned above, there are many different emergency fund benefits.

Do you have an emergency fund? Why or why not? How many months of expenses do you have in it?