Everyone needs an emergency fund, but not everyone has one. Some people might not know what an emergency fund is yet! If you fall into that category, then don’t worry. We'll be explaining the ins and outs of building your fund to plan for any financial emergencies that may come your way.
What is an emergency fund?
Let's start with Emergency Fund 101. An Emergency Fund is an account containing money that is set aside to help when unpredictable events occur. People usually store their emergency fund in a savings account. This money is set aside to ensure coverage for financial crises without causing an extreme change in your daily life and budget.
With student loans and paying off debt, no one wants to have to contribute to another fund, but an emergency fund is quite possibly more important than interest rates and credit scores. Often called a rainy day fund, an emergency fund is something you should consider contributing to whenever you have a little extra money, which helps pad your financial cushion for the future.
When should I use my emergency fund?
You should only use your emergency fund during a financial emergency. Financial Emergencies are unexpected events that cause a financial strain in your life. The following scenarios list some potential emergencies that would sanction the use of your emergency fund.
1. Job Loss
Unfortunately, a person could lose their job at any time. The steady income you have been used to could stop coming in. Unfortunately, your bills and monthly payments would not stop. In this situation, your emergency fund can help you pay for the essential expenses while you’re looking for a new job.
2. Medical and Dental Expenses
Breaking bones and becoming ill are not things we can control. If your health insurance doesn’t cover the entire hospital visit, you’ll be thankful you have a little bit of cash stashed away so you don’t have to accrue credit card debt.
3. Unexpected Travel
A relative is sick and may not have much longer to live. You must book your flight for this visit within the week, or the price will usually get higher. The fund you have prepared for the unexpected will come in handy with situations like these.
4. Car Expenses
Your check engine light comes on, and you’re unsure why. After calling the auto repair shop, they agree to look at your vehicle. Once there, you find out your repairs are going to be $800 dollars. Your emergency fund will help cover these expenses.
5. Home Repairs
During a thunderstorm, the wind tears at the siding of your house, and a leak is starting from the roof. After you receive your estimate from your home insurance company, you will still most likely have to pay for some of the damages.
The death of a family member is always painful, but especially if it is unexpected. That family member may have life insurance, but it’s not always the case. Having extra cash can help with funeral arrangements and making sure that everything is taken care of.
When should I refrain from using my emergency fund?
All of the items from the list above are “unexpected” events. If you are expecting an event, you should do your best to plan and budget for it in advance without using your emergency fund.
However tempting it may be to buy the latest accessories, clothing, or products, these purchases are not a good enough reason to dip into your emergency fund. Besides, seasonal shopping, like back-to-school and Christmas, should be budgeted into their respective months.
Routine purchases like groceries or gas should be budgeted each month. Even routine doctor check-ups should be included in your budget. Finally, annual maintenance follows the same pattern as the items above. It should be calculated into your budget for the year.
How much money should I have in my emergency fund?
At a minimum, you should have at least three months of your everyday living expenses completely covered, including your mortgage/rent, gas, utilities, and food. An excellent long-term goal for your emergency fund is to have anywhere from three to six months of living covered.
The more money you have in your emergency fund, the better off you are for unexpected expenses. Having a well-established rainy day fund gives you more financial freedom when an unpredictable circumstance occurs.
So, how do I get my emergency fund started?
Establishing your fund will require discipline and sacrifice, but it is not difficult. In fact, you can begin to build your fund with $7 per day. Besides depositing money, you can set a monthly savings goal, cut unnecessary expenses, save your coins, adjust the amount you’re contributing, and behave responsibly.
1. Monthly Savings Goal
First things first, you need to set a realistic goal for how much you will be adding to your emergency fund at the end of every month. It should be a consistent deposit, planned either by dollar amount or percentage. If you are unsure about meeting a dollar amount goal at the end of each month, consider using a percentage goal instead.
Using a percentage as your goal every month might make it a little easier if your budget fluctuates regularly. For example, committing to depositing 20% of your standing checking account at the end of each month may be a more realistic goal than $200.
2. Cut Unnecessary Expenses
When you're in the process of building your emergency fund, it's the perfect time to reevaluate your everyday small purchases. If you don’t need something, don’t purchase it. Try to focus on bulking up your emergency cushion before treating yourself. Once you have created a firm cushion, preferably with at least one to two months of full expense coverage, you can start loosening up your pockets again.
3. Save Your Change
Now might be a good time to dust off that old piggy bank because every penny counts! Loose change is usually the last thing on anyone’s mind, and as humans, we're prone to losing stuff, especially those small coins that we've subconsciously deemed as invaluable. However, despite your outlook on change, it can make a huge difference!
Placing change jars in various places around your home, job, and car will work wonders when it comes to saving coins. If you are consistent with collecting your loose coins, you’ll be shocked by how fast they add up. One last tip for saving loose change: instead of depositing it or exchanging it for cash immediately, keep the coins for as long as you can so you’ll be less tempted to spend it.
4. Assess & Adapt
After a few months of building up your emergency fund, take time to see how much money you’re saving, and don’t be afraid to adjust it. If you find yourself with excess funds at the end of the month, don’t hesitate to add some extra padding to your emergency cushion. On the other hand, lowering your monthly savings goal is acceptable, too. Just remember to be responsible and not reduce your monthly savings simply because you miss the extra cash.
5. Be Responsible
Holding yourself accountable for your emergency fund is very important. The amount of discipline you have can make or break your cushion. If you do decide to make unnecessary adjustments that will negatively impact your emergency fund, remember you’re only hurting yourself. After all, it is your emergency cushion.
Being financially secure is a personal finance goal for us all, but you need to be willing to take the first step. Discipline and responsibility play an essential role in securing a financially stable future, so don’t forget to hold yourself accountable. We hope that with the information and advice in this article, you’re able to begin building a stable emergency fund.
🏡Want to build your savings? Check out 6 Smart Ways to Save for Your Future.
🚨Still in school? Read Why is it Important to Have an Emergency Fund in College?