Why do I need an Emergency Fund in 2020? Let’s face it emergencies happen, and they usually happen at the worst possible time. Unexpected expenses can catch you off guard and increase the stress and burden of any emergency. Most emergencies can put you into debt, which can last years or even decades.
Who wouldn’t want to have the money to pay for these unexpected emergencies without the additional stress? The emergency is bad enough without having to worry about how you are going to pay for it!
This is why it’s vital that you have an emergency fund to cover life’s unexpected events!
What is an emergency fund?
Think of an emergency fund as your financial buffer between you and life’s unexpected events. You might have heard of an emergency fund by it’s other commonly used name, a rainy day fund.
This is money you set aside, in addition to your normal savings. That is to be used in case of a financial emergency.
Examples of a financial emergency could include a trip to the emergency room, your air conditioner stops working during the hottest part of the summer, or your car breaks down.
It is used to cover large unexpected expenses that are not planned for. They also cannot be covered under your monthly budget. It is important to save for these unknown emergencies; and your emergency fund is the way you do this!
What are the benefits?
The emergency fund allows you to pay for emergencies without the extra stress and worry of not knowing where you will find the money to pay for it. You can just write a check on the spot stress-free!
It keeps you from going into further debt, while you are trying to get out of debt. Imagine working through your financial goals to become debt free and then an emergency happens. You are then forced to take out a loan and go further into debt. Imagine how that would affect your financial and mental health!
An emergency fund can also ease the pain of unexpected layoffs. It’s in the news all the time of big companies going out of business and laying off their employees. I see it happen all the time from companies I work with.
Having a an emergency fund gives you a financial buffer to find a new job after a layoff, without the worry of losing your home or putting food on the table.
Let’s face it, if you own a home you know that anything that breaks is not cheap! Help protect you and your home in the event that something needs repair or needs to be replaced.
How much money should you have in an emergency fund?
The personal finance guru, Dave Ramsey recommends a fully funded emergency fund should have 3-6 months worth of expenses. This should be enough to cover just about any emergency or give you time to rebound from an unexpected loss of income.
3-6 months of expenses means the bare minimum you need each month to pay your monthly expenses, keep a roof over your head, provide transportation, and put food on your table.
Monthly expenses might include your mortgage/rent payment, electricity, natural gas, water, and car payments.
Unfortunately monthly expenses do not include things like cable or your sock of the month club (I loved my subscription! Goodbye goofy socks as they are not considered essential in an emergency).
When determining how much to save in your emergency fund do not include things like, eating out at restaurants or fast food establishments.This would be the time to cut all expenses that are not required to live or work.
Ask yourself out loud, “Is this expense essential and absolutely necessary?” This will help you determine what you should include in your calculations.
When should you use it?
The keywords here are unexpected and emergency. Ask yourself out loud these questions:
- Is this unexpected?
- Is this an emergency?
- Do I really need this?
- Is it small enough to put in my monthly budget?
Examples of when to use your emergency fund are:
- Loss of job
- Car Repairs
- Medical emergency
- Roof leaking or blown away in a hurricane (happened all around us when we lived in Florida)
When we had to use our emergency fund
Let me share a real-life example of when Vanessa and I need to use our emergency fund. A month after moving into our new house, we had a freak rainstorm. The power went out, our sump pump stopped working, and our basement flooded. Consequently after calling our insurance they weren’t sure it would cover our repairs it because we didn’t technically have “flood” insurance. We were however, able to write a check from our emergency fund and have the basement completely dried and new flooring installed. Many other houses flooded during this storm, with many families being unable to afford the repairs, until hopefully their insurance claims were approved.
The emergency fund should not be used for purchases that can be planned for. If you know a large purchase or expense is coming up in the future, plan for it and save overtime. For instance, Christmas happens on the same day every year, this is not an emergency. We save a certain amount every month throughout the year for Christmas, because we know it will be a large expense at the end of the year.
***Important. If you have to use money out of your emergency fund, when the emergency situation is over and as soon as you’re able, start saving again and build the emergency fund back to at least the original pre-emergency amount. Emergencies sometimes come in pairs, so the goal is to be prepared again as soon as possible.
How do I get an emergency fund?
***This is important.Your emergency fund should be separate from your normal savings or where you can easily access it.
By easily accessible it, we mean having an account with a debit card or any other way you can instantly access it. However, you should still have the ability to get money out of it in a timely manner when you need it. Most importantly, having it in another location helps to avoid temptation, because temptation can be the devil of us all!
Don’t be tempted to spend this money on unnecessary purchases like an 80-inch TV for Super Bowl Sunday or any other shiny object your heart desires at the moment. If ours was in an easily accessible location, my wife would kill me at the amount of puppies I would bring home! #puppiesarelife #Istilldon’tknowhowtousethesepoundsigns
Murphy’s law always seems to happen in these situations, where “anything that can go wrong will go wrong, at the worst possible time”. The moment you spend the money on a non-emergency, an emergency will happen, and you will be stuck in the exact situation you wanted to avoid by having an emergency fund.
For our emergency fund, we actually opened a savings account at a bank that we don’t have any other accounts at and that has no local branches. We refused a debit card and only have a checkbook that we keep locked in a safe. This helps us avoid temptation and feel a lot better knowing that we have the money in case we need it!
According to CareerBuilder 78% of Americans live paycheck-to-paycheck. This means that the vast majority of people in the United States couldn’t cover a $1,000 emergency!
This statistic is very alarming and is why you should act now to start building your emergency fund!
I know that we started sleeping easier, when we had our emergency fund saved and we knew that we could immediately pay for any unexpected events.
Start protecting yourself and your family from unexpected life events today by starting your emergency fund!