So, what is an emergency fund, how much should you have in your emergency fund, how do you save for it, where should you put it, and what should you use it for?
An emergency fund is a bucket of money you set aside to use when you have an emergency. It is a buffer when life happens, a stress reducer so that when the $h!& hits the fan you are not on the streets and desperate. There are many different ideas of how much you should have in your emergency fund. Dave Ramsey, famous for “Financial Peace University” and his radio show, lays out in his Baby Steps #1, that you should save a $1000 emergency fund, in Baby Step #3, you are advised to fully fund your Emergency Fund by saving 3-6 months worth of expenses. (To see a summary of Ramsey’s Baby Steps to Financial Independence go here.) How much you save is fully up to you, though more is generally accepted as better, for the surprises life throws your way. If you are lucky enough to have too much cash flowing in you may want to set an amount or months worth and then funnel extra to your investments or other buckets.
Saving for an emergency fund can seem simple to some and very difficult for others, so we will concentrate on those who may find it harder to save an emergency fund. One way to save would be to look at your budget and see what you can change, for example, if you have lots of subscriptions and some you don’t use, mayhaps it is time to cancel those and the savings can be funneled into your emergency fund. Looking at your expenses, there may be something like cell phone or car insurance that you could call customer service to see if you can pay less for your current usage, or if you can change plans, or perhaps it is time to change who you receive your cell service or car insurance from, time to see what is offered. Extra savings here can be put towards your emergency fund. Perhaps your budget is solid with little wiggle room. If you get a raise at work, could you put that extra towards the emergency fund? Could you do a side hustle and put the earnings from this second job towards your emergency fund? Could you sell a kidney , oh that isn’t legal in the United States. You could do a combination of cutting your budget and earning more, plus add the birthday money your Auntie Milly sends ($33 on your 33rd birthday, can’t wait ’til I’m 100!) The important step is to take action, start small, grow it.
Since this bucket is for your emergency fund, you should be able to quickly access the funds and they shouldn’t be invested in the stock market, which is volatile. I know that interest rates at money markets/savings accounts are low, low, low these days (remember the days of 4% interest back in the 1980s?), but this is your emergency fund and it’s job is to be there for you when you need it, so work to accept that it will not get a great return. There are some banks that offer higher interest rates, or banks that have sign-on bonuses, you are welcome to look at doctor of credit to see the bank rates and bonus programs. This website updates their content every month. If you do choose to chase bank sign up bonuses, make sure you abide by the program details and keep track of where your money is. I have done that, and now I have four savings/money market accounts and 4 checking accounts to keep track of, four sign-ins to remember, one day I will simplify.
Here are some examples of legit reasons to use your emergency fund: *You lost your job and need to cover living expenses while you get back on your feet *Your furnace went kaput and you need to call someone to see what is wrong *A family member had an emergency and you feel you need to purchase a plane ticket to visit them ASAP . Here are some examples where you should avoid using your emergency fund: *There is a sale at my favorite store and I need new _____ *I’m going to gift this money to my sibling/friend *My vehicle is functional, but would look so much cooler with these lights/stereo system/colored rims/etc.
The actual mechanics of what you do with your emergency fund may be a little messier than just putting a lump sum into one place. I worked out what 3-6 months of expenses looks like for our family, I looked at our checking accounts and what amounts usually come out throughout the month and decided part of the emergency fund would stay in checking accounts to create a buffer since funding in and expenses out happen throughout the month and not always consistently. If you wind up with an ever increasing extra $ each month, congratulations! That likely means you are earning more than you are spending, and that is something worth toasting, (how about a watermelon mimosa?)! That is an article for another day, maybe that money should be going into other buckets (do you have more room for your 401k or other pretax investment vehicles? or is your Roth IRA maxed out? or hello new-to-you car or downpayment for home or taxable brokerage account, you get the picture). So, emergency fund, if you don’t have one, start saving so you can get one!!
As Ever, SOS
Post Script: I was looking for a piggy bank to take a picture of for this article and found a ceramic soccer ball, a wooden puzzle box, another wooden puzzle box, and a ceramic clown, all of which I wasn’t sure if it would be obvious what the item was. I just found this piggy bank at our local toy store, Just Imagine Toys, and I love the idea that this will spark conversations with our kids on saving, spending, donating, and investing. Shhh, it’s a present for when our oldest loses his first tooth and the tooth fairy(if available and willing) leaves some coins in exchange for said tooth.
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