Picture this: you’re standing in line at the dollar store holding a bag of ramen noodles (literally two dollars, at most) you get up to the register to pay, and your card is declined. Adulting is a struggle, and being broke is part of the territory. We’ve all been there. But if you are currently there, I am here to introduce you to Emergency Fund: What It Is and Why It Matters.
Emergency fund step 1: what is it?
The first thing you need to know is that it is essentially a savings account that exists solely to bail you out of trouble. Car messing up? Use the emergency fund. Need your wisdom teeth out but don’t have insurance? Bippidy boppidy boo; Emergency fund.
Having an emergency fund can really give you peace of mind if and when something really terrible happens—like losing your job completely unexpectedly—because you can focus on solving the problem instead of basic financial survival.
Emergency fund step 2: save
The second thing you should know is that your emergency fund is based on how much you are able to save. Not everyone can save the same amount, and that’s okay. But a good rule of thumb is to have three to eight months of expense money squirreled away.
I know that sounds like a lot of money, but remember that this is a go-at-your-own-pace kind of thing. Starting small leads to saving big. Opening a savings account and depositing $500-1,500 in there is a great start. Breaking it down into smaller amounts is a great way to make saving seem less overwhelming, and once you’ve built it up a little it will feel really good to know that you have a safety net just in case.
Emergency fund step 3: Expense amount
But, going back to the three to eight months of monthly expenses, how do you know how much that amount is? Well, there is no simple answer to that question because it varies from individual to individual. Basically, you need to save enough money to be able to continue your life as you currently live it without bringing in any income. And by basically, I do mean that’s the basics. If you want to factor in luxuries, you need to save more money.
The exact amount you decide to save is completely up to you, but remember that you are determining how well you will be able to live in an emergency situation, so be kind to present and future self by making smart choices.
Emergency fund step 4: when do you need it?
Here are a few reasons you may need an emergency fund:
- Loss of income
- Medical emergencies
- Child/pet emergencies
- Car breakdown or accident
- Necessary travel
- Having to take a leave of absence from work to care for an ill family member
Emergency fund step 5: When don’t you need it?
So, if those situations aren’t emergency, what is an emergency? And when do we know not to use the emergency fund?
Speaking as someone who thinks that not getting to have brownies on a regular basis is cause for alarm, I needed a kick in the pants with this topic.
Specifically, financial emergencies are unexpected major expenses that are related to keeping your financial future, your health, or your assets intact, forcing you to use money immediately—money that you may or may not normally have on hand.
Here is a list of things that aren’t emergencies:
- Elective healthcare (like plastic surgery)
- A great deal on vacation prices
- Destination wedding flights
- Home improvements (i.e. cosmetic improvements, not necessary repairs)
- A new TV
Emergency fund step 6: How to save
So, we know what is/isn’t an emergency, and we know we need to save for the real deal—but where is the money supposed to go?
I recommend a money market account. This gives you instant access to the money whenever you need it, and it allows you to earn some interest on the lump sum while it sits around waiting to be used.
It’s also smart to keep this money in a different bank than your regular bank, so that you aren’t able to take money out whenever you want to.
Remember, it’s always a good idea to prepare for the future because you never know what life is going to throw at you. So, start that emergency fund, get to saving, and good luck out there!