3 Reasons Why You Need an Emergency Fund

What is an Emergency Fund?

An Emergency Fund is money that you set aside for life’s unexpected events. Some people prepare for these events by saving money in advance of the emergency, while the majority of people don’t. According to a GoBankingRates savings survey, 58 percent of respondents had less than $1,000 saved. How would you handle an emergency today?

3 Reasons Why You Need an Emergency Fund

I can give you 3 reasons why you need an emergency fund. You only need one of them to justify getting prepared in advance.

Reason #1 – Auto and Home Repairs

For me personally, few things have been more stressful than jumping in my car to leave for work or an event, and the car won’t start. How about getting home from the grocery store on a Saturday afternoon with two hundred dollars worth of food, only to find that the refrigerator is out. Argh!!!

Reason #2 – Medical Emergencies or Death in the Family A trip to the emergency room by ambulance or the death of an out-of-state loved one will generally result in hundreds or thousands of unexpected expenses.

Reason #3 – Avoid Taking on Debt The best way to avoid being in debt is to avoid getting debt in the first place. Paying for emergencies with credit cards or loans could result in you paying far more than you would have with your emergency cash!

Your “Starter Emergency Fund”

Your “Starter” emergency fund is designed to help you respond quickly to life’s minor financial emergencies without the stress and anxiety of having to borrow money to deal with it. In his blog post, “A Quick Guide to Your Emergency Fund“, personal finance expert Dave Ramsey suggests a $1,000 starter emergency fund to create a buffer between you and life’s unexpected events.

Your “Full Emergency Fund”

To prepare for a large financial emergency such as job loss, Ramsey suggests that you have a “Full” emergency fund equal to 3 to 6 months of expenses. He recommends 3 months for a family with two incomes, and 6 months for a single income family or an individual. You can find tools to help you calculate the right amount of your full emergency fund such as Nerdwallet’s Emergency Fund Calculator.

Where Should Your Emergency Fund be Kept?

While I wouldn’t recommend keeping $1,000 cash under your mattress or in a jar buried in your yard, the money does need to be readily available to you, quickly. An emergency fund is not an investment, it’s more like insurance. Its purpose is to protect you so don’t put it where it might take several days to get your hands on it. Keep your starter emergency fund in a savings account with a fairly decent interest rate.

A Drone, New Purse or Concert Tickets are Not Emergencies

Once you’ve worked to save up for a financial emergency, you’ll need to exercise quite a bit of self-control and discipline to use the money for what it was intended… real emergencies!

If you need help with your personal finances book a complimentary financial coaching consultation to discuss how we can structure a plan that will work for you and your family.