Who should have an emergency fund?
Everyone. Rainy days come for everyone, and I don’t know anyone who enjoys standing out in the rain day-in and day-out. No matter what happens, these events have to be paid for so with proper planning and discipline, we can prepare for all but the most extreme “worst case scenarios” without going deeper into debt.
What is an emergency fund?
It is essentially your grandma’s rainy day money jar. It literally doesn’t have to be a jar hidden under a loose floorboard, but that works just as well. It is a place where you intentionally set aside money in the good times (rather than blowing it) for the not so good times. It can be a jar, an envelope in a safe, a bank account or anything else clever that works for you.
When should I start my emergency fund?
Honestly, you should start it yesterday. The second best time to start it is today! It seriously is that big of a deal. According to a Forbes article written almost a year ago to the day, over half of Americans could not financially float a $500 emergency. When the average income for a household in the United States is just a bit over $50,000, it makes you wonder how this is possible? The inability of over half the nation to have 1% of the average families gross income set aside is an honest to goodness emergency. That is why we say that you need to start your emergency fund yesterday if you do not have one. You need to start it yesterday because while today may be good, who knows what the weather will be like tomorrow.
When should I use my emergency fund?
Our general rule of thumb is simple. If you can find the event on a calendar or if there is not irreversible damage done to ones health, career, and life it is not an emergency. Let’s explain: Birthdays, scheduled doctors and dentist visits, holidays, anniversaries, maintenance on property/vehicles, and anything else you know is heading your way is NOT an emergency. You know it is coming, prepare for it.
Now let’s say you get in your vehicle and the window will not go down. Will this cause irreversible damage to you or your family? Unless you are a mail carrier the answer to this is probably no (it just means no drive-thru). In this case, this is not an emergency. If you are driving down the road and hit glass and it shreds a tire, this may be an emergency. Do you have another vehicle able to meet your needs? If you do, it is not an emergency. Just save for the repair and fix it in due time. If you have to have this vehicle to get to work that IS an emergency. Too many times we convince ourselves that the inconvenience we are dealing with is an emergency.
Where should I have my emergency fund?
This money needs to be close enough to be accessible in a real emergency but not so accessible that the Chinese delivery guy walks off with a portion of it every week. It all depends on how much discipline you have. If you tend to spend any green lying around, keep it in a bank account with NO debit card attached to it. Like we said before, this money could be kept in your home but there is no FDIC/NCUA insurance protecting it there (theft, fire, loss, etc will all make it a 100% loss). A good middle-of-the-road solution would be to keep the majority (80-90%) of this money in a separate bank/credit union account locally that has ATM access for after hour emergency withdrawals. Keep the rest of it hidden well at home for anytime you need cash-in-hand (which shouldn’t be often). A final thought: make sure to keep this money in a separate account from your “regular” checking/savings so you don’t accidentally spend it.
Why should I have my emergency fund?
Here’s a little story that recently happened to us to help illustrate this: We arrived at the dentist’s office for our 6-month check-up (not an emergency). It was time to get some new X-Rays and lo-and-behold, Jason and I had to have a matching set of “his and hers” root canals! THIS qualifies as an emergency. As we found out, root canals are expensive… This is why you set money aside and when you use it.
How do I make my emergency fund?
You have to be intentional. The easiest way to do this is to take advantage of your bank account’s ability to do an ACH transfer (electronic account transfer) on a schedule so you never see the money in your main account. You can set this up online or talk to your bank/credit union to do this. We first set ours up to move $20 a week to the emergency fund account until it was built up because we did not have a lot of extra money starting out. Although $20 a week over many months adds up quick. A funny thing sort of happens when you do this, you really don’t miss money that you don’t see. You can’t plan to spend money from your account if it is not there. This is assuming you took the “two accounts” approach. If you want to keep all of it in paper, you would just need to stop at the ATM or bank and withdrawal accordingly. Before you keep large amounts of money around (think along the lines of > $10,000), check out this article on Snopes. While it’s not illegal to have $10,000 in cash, it can be risky. The real power in having two accounts is that it can be automated so when you forget to set it aside, it keeps working for you.
How much should I have in my emergency fund?
At the very minimum, unless you can barely make ends meet, the absolute minimum emergency fund should be $1000. More than $1000 is wise. If you can’t do $1000, set aside as much as you can afford to. Most appliances, vehicle repairs, minor medical procedures, etc can be covered within reason by $1000. The idea of having at least $1000 is that it will deflect most of the “smaller” problems and let you get on with your life without all of the stress and drama a lack of available money brings. The problem is, there is too great of a possibility for something far more expensive to happen. A roof repair, an engine/transmission, a surgery, a vehicle accident, job loss, loss of a loved one and so many other things can happen which will far exceed $1000. Ideally, having up to 6 months of household expenses put away can drastically ease most of these situations.