Emergency fund, safety net, cash stash, or whatever you want to call it, is by far one of the most important pieces of any financial journey. One thing is certain, in the case of an emergency, cash will always be king.
I’ve mentioned my emergency fund a few times throughout the blog, but I’ve never really talked about the why, when, where, and who care’s of having one.
Quite frankly, everyone should care because it’s what keeps you out of debt, or at the very least mitigates the financial blow most emergencies will have on your finances.
Let’s Start With The Why?
Having an emergency fund or cash that is 100% liquid, in my opinion, offers two important things: peace of mind and a safety net.
When I first started getting myself out of debt I wanted to make sure I never ended up back in the revolving door of what is American consumerism debt culture. In order to do this, outside of budgeting and putting an end to unnecessary spending, I had to make sure I was prepared for an emergency.
Think about someone you know who has lost a job. On top of the added psychological stress of job loss, they now have to deal with the bills that don’t stop, when employment does.
Finding the money to pay the bills typically ends up on back on a credit card or by finding other ways to borrow to get by. Just like that, we’re back where we started.
I saw this first hand, pairing with the housing crisis, in my own family and the toll it takes financially and mentally. I vowed to at least, to the best of my ability, be prepared financially for this.
While I can’t predict when or if this will ever happen to me, there’s a small inkling of relief knowing that if it does, I’m financially prepared. I don’t think anyone is ever mentally prepared, but it removes a partial stress factor out of the equation
How Much of an Emergency Fund Is Enough?
This part took me some time to pin down and even now, I’m not sure if what I have is enough. Conventional wisdom and financial guru’s like Dave Ramsey will tell you to save up $1,000, pay down debts, and then aim for 3-6 months of expenses saved up.
The bold part is important because initially, I thought it meant income. The reason I wanted to know how much I spent each month was to calculate how beefy my emergency fund needed to be. This meant calculating expenses that were important: fixed expenses, food, and things like gas money. The rest could disappear from my budget, in the case of an emergency.
I currently have somewhere in between 4-5 months of expenses at the ready, just in case. I think ultimately, you’ll have to decide for yourself the correct amount depending on a few factors. Is your job stable? Do you work primarily off commission? Is your field competitive? If your income is unstable and job security doesn’t exist, beef up the emergency fund to 6-9 months of expenses.
When Do I Use the Emergency Fund?
- Job Loss: The whole purpose here is to have enough saved up so that you can get through the months, without financial worry, while looking for a new job. It’s also to ensure you don’t fall back into debt immediately.
- Medical: I know and you know medical bills are usually astronomical and sometimes, even meeting the deductibles can put you right back in the red.
- Car Repairs: No, I’m not talking about fixing the A/C (even though in Florida, that definitely feels like an emergency). I’m talking car repairs that are essential for your car to run. Although, some could argue saving for car repairs should have its own category outside of an emergency fund.
- Pet Emergencies: I added this one for me and the many pet owners I know. Having your four-legged furry family member need medical attention can sometimes be just as costly and your own medical needs.
These are just four examples, but you get the idea. It should be quite obvious what isn’t an emergency by this point. But just in case:
- New Phone
- New Car
- House down payment
These are NOT emergencies. Save separately for these things.
Where Do I Stash This Cash?
You want your E-fund to be entirely liquid. You don’t want your cash tied up in the stock market, or in a CD where part of your money is locked away. Ideally, you want to stash it in a high-yield savings account. Capital one and Ally have decent interest rates compared to a credit union or local bank.
Just remember, where ever you have it, you want to be able to access it quickly.
You Should Care About An Emergency Fund
Being prepared for the unexpected is paramount for your financial health. One small emergency can easily set you back.
Remember, nearly 7 in 10 Americans have less than $1,000 saved up. Don’t be a part of this statistic
When the moment comes to use this money, it’ll sting. But I’ll bet money, you’ll feel the sting exponentially less than if you didn’t have it.
Share your stories below of when your emergency fund came to the rescue!