My emergency fund has saved me countless times. I haven’t touched a credit card for emergencies in over 3 years. In this post I go over why you need an emergency fund, how much you need in your emergency fund, and where exactly you should put it.
IMPORTANT! An emergency fund will not solve all of your problems with money but it is a great start in your finances.
What is considered an “Emergency Fund”
- It is not an exact amount or a cookie cutter “one size fits all model”
- Every emergency fund varies depending on your life
- Emergency funds should not be for planned events or purchases like buying a new car, purchasing a home, or going on vacation.
- An emergency fund can be any amount, and anyone can start one with any amount and grow the fund from there.
The number one reason for an emergency fund is to focus on the actual emergency instead of worrying how you will be able to pay for it.
Why you need an Emergency Fund
Almost every person in the world has gone or will go through some sort of an emergency that requires money. Pre planning and saving for emergencies is better that having an emergency and wishing you had saved for one. Emergencies are mainly unexpected and will require you to have money on hand quickly.
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Popular emergency situations:
- Medical emergencies
- Large copays
- Loss of Income
- Loss of an immediate family member
- Natural disaster resulting in loss
- Children related emergencies
- Pet emergencies
- Car accidents
Pure wants, these are NOT emergencies:
- The brand new tech release…. Iphone, Ipad, camera, laptop, etc.
- A vacation to an exotic island because you feel like it
- Home upgrades…. new furniture, floors, or backyard renovations
- A luxury bag you saw scrolling through instagram
Where you should put your emergency fund
I personally have my emergency fund in a Capital one 360 High yield savings account. I chose this account because it has a higher interest rate overall than regular savings accounts at banking institutions. All of my savings accounts combined create anywhere from $8.00 to $10.00 a month in interest every single month (considering the amount of money I have saved)
I know that $10.00 a month is not a huge amount and I am NOT going to get rich anytime soon BUT I will take $120 in passive income a year over $0 for my money sitting in a regular bank account anytime !
My personal opinion
Put your emergency savings into a SEPERATE checking account at a completely different bank that you normally use.
Why?
If and when you need the emergency fund money, you can easily access it with a debit card. You don’t need to transfer your money from the savings to the checking and wait for it to post (someone cue Kevin Hart lol)
You will also avoid using the money with your everyday spending since you will have your spending/bill money in a different bank account.
How much should your emergency fund be?
There are different versions of what an emergency fund should be. A great rule of thumb is to have 3-6 months of expenses saved.
Suze Orman states you should have 8 months of expenses saved
Dave Ramsey states to save $1,000 for an emergency, pay down all your debt (except mortgage), and than start saving for 3-6 months of expenses.
I personally prefer to save 3-6 months of current INCOME. Expenses are only a small part of your money situation and only having expenses saved during an emergency will be pretty uncomfortable.
Granted if you lose an income, you do want to live well below your means and waste as little as possible BUT I would prefer more 3-6 months of income saved.
Getting started
If you are just starting, start small. Start with any amount you currently can afford even if its $20, $50, $100, It does not matter. As long as you are saving something toward your emergency fund consistently, you will see growth. Deciding on the amount your emergency fund should be is something you and your family should figure out together. If you are single, come up with an amount that will make you feel secure if something were to happen.
No matter what you do, try to only touch your this fund for strictly emergencies. Remember: start with what you have and build from there. you don’t need to have 3-6 months of expenses or income saved in a matter of months. Steady progress is what you are looking for.
Emergency funds will ultimately keep you from staking on more Credit card, if you don’t have credit card debt, it will prevent you from having any in the first place. Everyone should have an emergency fund no matter their income.
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