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Have you ever had a financial emergency?
You know, the thing that only happens at the WORST time possible?
Like a fender bender when you’re already late for work?
Or the dishwasher decides to throw a bubble party in your kitchen?
Or your kids decide to use your flat screen TV for Nerf target practice (just before the Super Bowl?!)
And that’s where your Emergency Fund steps in to save the day!
An emergency fund is money that you have set aside for any large, “unplanned” expenses that come up.
A few examples of this could be:
- A car accident
- A broken appliance
- A medical emergency,
- or job loss.
The money should be put away in a savings account (NOT your checking account), and should NOT be touched unless it’s a true emergency.
(Finding a “deal” on concert tickets, or wanting to buy Amazon’s “Deal of the Day” does NOT qualify as an emergency!)
Let’s break down the details of saving an emergency fund, specifically talking about Why, How Much, Where, and For What it should be used.
Why Should I Have An Emergency Fund?
Why should you have a pile of cash that is used exclusively for emergencies?
An emergency fund functions as a brick wall to block out potential financial disasters.
When an emergency arises, you want to have the cash to take care of it, otherwise that emergency will haunt you for far longer.
If you don’t have the cash on hand, you will throw the cost of that emergency on a credit card and NOT pay it off before the end of the billing cycle (because you don’t have the money).
You will then pay interest on your emergency, which is just rubbing salt in the wound of having to deal with the emergency in the first place.
Having an emergency fund allows you focus on the emergency at hand instead of wondering how to finance it.
How Much Should I Save In My Emergency Fund?
I think a better questions is:
How much helps you sleep better at night?
Everyone has a different answer to this question. Depending on your life circumstances, this answer may vary.
But what do the experts say?
Many financial gurus recommend saving $1,000 in your emergency fund before tackling your debt, then raising that amount to 3-6 months of expenses after your debt is paid off.
Some say you need as much as 8 months of expenses set aside.
I think $1,000 is far too little to deal with a real emergency. But I also don’t think you need 6 months of savings sitting there, untouched, until later.
I recommend having 1-Month of Expenses set aside in your Emergency Fund.
This amount serves 2 purposes:
- It gives you a few thousand dollars to deal with larger emergencies (car transmission replacement, ER medical bills, etc.), and
- It gives you the ability to have ALL your money for the next month saved up BEFORE the month begins.
The goal is to be able to absorb the cost of life’s fun little “financial detours”, without affecting your monthly budget, or your goals.
Having 1 months of expenses is hardly enough if something serious occurs.
Job loss, or a major medical situation requires a larger buffer.
In my 5 Steps To Financial Freedom, I outline that Step 1 is to save one month of expenses.
Then you should pay off debt and invest before building a larger emergency fund.
Once you are debt free and investing, I recommend saving (up to ) 12 months of expenses in your Emergency Fund
Again, the exact amount here is a general guideline, but the real answer is what makes YOU feel comfortable.
For some, 3 months is just fine, for others, they NEED 12 months to enjoy life.
Whatever that number is, just make sure it’s in the right type of savings account (see below).
Where Should I Keep It?
So now that you are saving up an emergency fund for the reasons stated above, where are you going to store this cash?
I suggest not keeping it in your checking or savings account where you have immediate access to it.
I definitely don’t suggest in an envelope under your mattress!
If you do this, you run the risk of tapping your emergency fund for non-emergencies. Now, I know YOU have more self-control than that, but I certainly don’t!
I recommend stashing it in a Money Market or High-Yield Savings account. This will keep it from being spent, AND earn you the highest interest possible.
The CIT Bank Money Market account is currently the highest rate around, has a slick mobile app, and you can get started with as little at $100. CapitalOne 360 Performance Savings also offers a great rate and simple sign up.
Or you can check out the list of Top High-Yield Savings Accounts to find one that works for you.
Here’s my method for stashing away your emergency fund:
- Sign up for a CIT Bank Money Market account.
- Once signed up, go into your new savings account and setup an automatic transfer from your checking account.
- Start with a small amount, and challenge yourself to up the amount every month!
You can call this account “Emergency Fund” while you’re building it up.
The goal is to eventually turn this into your “Month Ahead” account, and have your paychecks deposit directly in here. Then you only transfer over what you need for the next month to your checking account.
How To Save For My Emergency Fund
Automating your savings is a great way to get started, but saving up $4,000 or $5,000 might seem like a HUGE task.
Here are a few ways to speed up your savings and build your emergency fund quickly!
Sell your stuff! This is a fantastic way to jump start your savings account. Michelle and I sold a TON of stuff when we sold our house, and we didn’t realize the gold mine we were sitting on. We made over $7,000 selling stuff we didn’t use or didn’t need anymore. We sold anything we thought was worth $5 or more.
I challenge you to sell 3 THINGS from every room in your house THIS MONTH. This includes bedrooms, kitchen, living spaces, bathrooms, and garage. For a typical 3-bed/1-bath house, this simple exercise could net you at least $100!
Stretch Goal: Sell 5 things per room, and try to average $10 per sale. This is a HUGE boost to your savings account.
Save Your Extra Paycheck. For those getting paid bi-weekly, you get an “extra” paycheck every 6 months. If that paycheck is coming up, simply transfer it straight to your Emergency Fund for a quick boost!
Cut expenses. To harness the power of your budget, you can go through an find places to save extra money. Then transfer that savings into your emergency fund savings account at the end of the month.
Looking for ways to save? Check out THIS POST for over $20,000 worth of ideas!
What Can I Spend My Emergency Fund On?
Now the real question. When do I get to use all this money?!
Seriously. Stop staring at this pile of cash and drooling over the possibilities. You should probably forget this money even exists.
Your emergency fund is meant for true emergencies only.
A hole in your sock is not an emergency that requires a new wardrobe.
A scratch in your car doesn’t mean you can now declare a federal state of emergency and go buy a new car.
And yes, even minor car repairs are not an emergency (because you having a car repair fund in your savings buckets for that….right?).
An emergency is a completely unforeseen circumstance that puts you without a necessity.
You are required to fix this issue or you will be without something that you actually need.
And when you happen upon an emergency, you should have no guilt or qualms about paying for it with your emergency fund. That is what it is there for.
This is where the peace of mind really comes into play.
Your emergency that could destroy your financial life suddenly becomes a manageable event.
USING YOUR EMERGENCY FUND: A REAL LIFE EXAMPLE
Just over a year after moving into our first home, our hot water heater died!
More accurately, it started leaking all over the garage floor, and needed to be replaced ASAP before it damaged anything.
Remembering that we were already living ONE MONTH AHEAD of our expenses, I knew we had the money to replace the water heater.
I quickly shut off the water, and hopped on the Google to find out how much it was going to cost. A quick search showed that it could be up to $3,000 to have someone replace it for me.
We could have happily paid someone to take care of the mess, but my frugal muscles were activated, and I said “I can do this myself!”
I found out how to DIY replace it myself, and then went to the nearest Home Depot to get a quick replacement water heater.
HOW TO GET THE MONEY!
This is the process we use to put our emergency fund into action was simple.
- Purchase the required materials using our credit card.
- Add up the total cost and transfer that amount from our CapitalOne 360 Savings account (where our emergency fund is stored) into our checking account.
- Pay off the credit card right away so it does not interrupt our normal monthly budget.
And that’s it! As usual, spending the money was the easy part.
I then followed the step-by-step instructions from Youtube. With a LOT of help from my brother-in-law and some tips from a friendly neighbor, we had it replaced that afternoon.
Though it took most of my Saturday to replace the unit, we were only out $550 instead of the possible $2,000+ had we hired out the labor.
There are two things you should take away from this story:
The internet can save you money. If you are reading this blog, then you have access to the most powerful, comprehensive knowledge database in the history of mankind at your fingertips. As the saying goes, “knowledge is power”, but it can also save you from paying for someone else’ knowledge or labor.
I am from the school of thought that you can be your own emergency fund on some occasions if you take the time to educate yourself on how to find information on the internet.
You MUST have an emergency fund in place before you start doing anything else with your money. Life is unpredictable, so plan for the unexpected.
Do YOU have an emergency fund in place? How much do you have saved?