KJ: So we had a bit of a real-life experience this past week on the importance of funding your emergency fund. Not only do you never know when you will need to dip into it, but you don’t know how quickly you may need access to it either. Plus, money is the last thing you need to be stressed about when dealing with an emergency. So, how then do you make sure you have enough money in your emergency fund for when you really need it? We’ve written about it quite a bit over the last couple years of our blogs, but this past week really hit home on the WHY we save like we do. Not only was our recent dip into the emergency fund stressful and woefully unexpected, matters would have made the situation worse had we not been prepared financially when it came time to pay the piper. Hey, just because you’ve built up your emergency fund doesn’t mean it’s any less painful to spend it when the time comes! Let’s start with some information on what an emergency fund is, what it isn’t, and what you should do to protect you and your family in an emergency situation.
What is an emergency fund?
Any good emergency fund should have the following characteristics:
It should be highly accessible. Don’t plan on equity in your home to serve as your emergency fund. That’s a terrible idea as people saw firsthand in the 2008-2009 real estate bubble bursting. But, your emergency fund should be invested in highly accessible cash, be it a money market account or a savings account. Once you’ve built up your various buckets, for the first $5,000 of your core-emergency fund, don’t bother trying to do anything fancy with Certificates of Deposit (CDs) or any investment product at a brokerage firm with today’s low interest rates. You NEED it to be highly accessible and penalty free when you’re in a bind, so having the flexibility in just a regular savings account is often preferable.
It should have a minimum of $1,000 quickly. It should be filled with at least $1,000 to get started right away, but it should be built up with enough funds to cover your home, health, and auto deductibles should something crop up unexpectedly (not quite as rare as you may think!). Then, look to build it to that magical 3-6 months of your living expenses, so it can serve that additional purpose in the event of a job loss.
It should be reserved for emergencies ONLY. This one is plain and simple. Don’t use this for when that TV of yours breaks, upgrading appliances, or taking a trip. Hold strong and use it for its intended purpose!
It should protect you and your family. Any good emergency fund should be able to provide your family with the cash you need, so you don’t have to rely on high interest credit cards or lines of credit. Those just add fuel to the fire and make your emergency situation just that much more difficult to dig out of.
It should provide peace-of-mind. Once you’ve saved the proper amount, your emergency fund helps take the added financial stress out of the situation. The last thing you need to stress about when dealing with a health, home, or auto emergency is the financial aftermath, so why make the situation worse. It’s easy to get behind, so dig your heels in and get ahead before it’s too late.
A way to ensure you won’t be a burden to your family. This is particularly important to us in an emergency, as what you need most from family is emotional support and not financial support. An emergency fund protects both you and your loved ones.
What an emergency fund is NOT.
It is not to be used for regular living expenses. As in the above writing, don’t use it for everyday needs. Oh, my checking account is low, or, I need a better pair of shoes. NO! If you find yourself wanting to dip into the account for these purposes, then head on over to our earlier post on finding a surprisingly free (and simple) budgeting tool to give your budget a quick start, so you can quick-stop your reliance on your emergency fund for every day use.
It is not illiquid. Don’t rely on real estate, rental real estate income, or investments to be your core emergency fund. Sure, over a VERY long period of time, you could come out on top if you could eek out a little extra return, but the lack of flexibility when you need the funds most can be a huge issue.
It is not pushed aside and never looked at again. Just because you have built up your emergency fund one year, doesn’t mean it will forever be the same amount your family needs. Periodically check to see if there may be more you need to save up. Maybe your expenses are higher or your risk factors for health issues have increased, meaning you need a higher balance in your emergency fund. Again, start with $1,000, then build to $5,000, then build to 3-6 months of living expenses.
It isn’t a planned expense. An emergency fund is for just that: an emergency. Don’t use it to fund a known expense coming up for a roof replacement, new fence, etc.
So, how then do you plan on using your emergency fund?
Have quick, direct access to your account to transfer funds to a checking account. If it takes multiple days for cash to be available and is at another institution than your checking account, that can be troublesome at times.
Know how and where to go. Don’t bottle this up and keep information from your significant other. Make sure both of you know how and where to go to raise funds as needed. It doesn’t help to have saved the money and have it available if you don’t both know what to do. Think of it as a little at-home cross-training.
Lean on your everyday credit card. This one carries a big caveat, but if you have properly built up your emergency fund, then simply putting the expense on your credit card, and then subsequently transferring cash to your checking account to payoff the bill ASAP can be an a-okay solution. We wouldn’t have been able to do this recently had we just graduated from college, but as we’ve continued to build our credit, we’ve increased our access to credit too (actually quite scary what the credit card companies think is OKAY to have access to!! But, we’re responsible, so we’re not racking up ANY credit card debt in the process that isn’t paid off in full each month).
- Do you have a fully-funded emergency fund?
What amount do you need for your emergency fund?
Don’t delay, and start an emergency fund today!
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