Emergency funds might sound like something new, or something you’ve heard of several times in the past. You may have one or you may not. According to statistics, though, if you reside in the U.S. in 2020 there’s about a 41% chance that you don’t have an emergency fund.
And about 19% of Americans only have up to 2 months worth of expenses covered with funds currently in their bank according to GOBankingRates.
These types of statistics are the very reason why it is essential for us as Americans to learn about the importance of an emergency fund. What is the purpose of an emergency fund?
In short, the purpose of one is to protect your livelihood in the case of an emergency. This way, you are able to stay afloat without needing to accumulate more debt.
In the following paragraphs, I will be going in-depth into the intricacies of an emergency fund.
How Does It Work?
An emergency fund is money that is set aside to cover large and unexpected expenses. The emergency fund is designed to create a type of buffer for your financial situation. This way, you are able to keep up with mandatory expenses during an emergency without relying on credit cards or taking out loans.
These expenses can be an array of situations encompassing the following:
- Home Appliances (food, gas, water, rent/mortgage, etc.)
- Home Appliance Reparations (AC, Heating, Plumbing, etc.)
- Automobile Reparations
- Medical Expenses
- Any other mandatory expenses
We as humans may sometimes come across the temptation of using this fund to purchase something that we can’t afford with our regular checking account, even if we don’t need it. That new phone is not an emergency. If you need a new phone but you don’t have enough money right now to purchase the best next thing, stick to something more affordable.
That emergency fund is strictly for unforeseen, mandatory emergencies.
How Much Should I Save for an Emergency Fund?
This is particularly different for every person. To determine the minimum you will need to save for an emergency, audit the past three months’ worth of expenses. How much did you spend on mandatory expenses? What else would you like to cover in the case that you no longer have the income to cover it? Now multiply that by 2.
Depending on your financial circumstances this has to be AT LEAST six months’ worth of expenses. I personally like to keep mine for a whole year’s worth. And still, I keep adding to it. I simply don’t add as much as I did when I first started it because now I’ve reached the goal that I originally had.
I recommend starting your emergency fund with about $1,000. You’d be surprised how much $1,000 can help you out in the case of an unforeseen expense. Though this is not what you should be aiming for, this is only a start.
Start with $1,000 and build it over time, the key is to start NOW!
How Do I Build/Fund An Emergency Fund?
There are several ways in which you can build an emergency fund. However, they all involve the discipline to control your emotions, delay gratification, and control your daily spending habits. Financial success overall depends heavily on your own emotional discipline.
Here are some quick tips to follow to build an emergency fund. You can either follow one of these or use more than one of these tips to speed up the process.
- Sell things
- Look at your home. What do you use? What do you not use? What do you need? What do you not need? Whatever it is you’re selling, list it on an online marketplace for the easiest selling avenue. Facebook marketplace is a great option, but it’s not the only one! You could also look into a garage sale or other selling avenues that don’t involve online movement.
- Save your tax refund.
- Put it all in your emergency fund if you don’t need it for any necessary expenses.
- Automatic transfers
- Every time you get paid, set money aside to go to your emergency fund. Now you won’t be thinking about it or forgetting to fund that account. It’s an automatic thing. You could even ask your employer to directly deposit a certain portion of your money to the emergency fund.
- Set monthly saving goals
- Short-term goals tend to do the trick! The shorter the goal, the more accessible it seems, and the easier the process gets to reach that goal. Baby steps go a long way to reach one ultimate goal.
- Keep the change
- Did you get $0.71 worth of change on your last purchase? Save it! You’ll be surprised to see how that and other change will start to add up over time. Don’t use cash? There are apps for this too!
- Side-hustle, second job, or both!
- Getting a second job might not be what you may be looking for right now, but it will pay off later. If you don’t need the extra income from the second job for anything else, put it into your emergency fund! You’ll be very grateful that you did when an emergency arises. You will have that money there to back you up!
- Side-hustles are an excellent option because you don’t necessarily need to go through the whole process of getting a new job. Grab a lawnmower and go mow the yards of people who are willing to pay someone else to do it. Paint someone’s fence, start an online gig. All these options could even become a full-time gig providing you with more income than your current job! Do anything that gets you extra money. Doing this and/or a second job will also skew you away from having time to spend your money. By default, you’ll end up saving more.
None of these options may look like easy tasks. They are simple, but they may be difficult to keep up with. Ultimately, you have to make the decision to discipline yourself. Make the decision to put a little extra effort to not let the next unforeseen expense put you in a hole of debt.
Where Does an Emergency Fund go?
An emergency fund ideally needs to be in a separate account from your usual checking account. The reason why is that when it is easily accessible in the same account as your usual spending account, it is a lot easier to spend it. Every time you are tempted by impulsive spending behaviors, it will be spent.
This defeats the whole purpose of the emergency fund. At the moment you may give yourself excuses to justify your impulsive purchase. You might convince yourself that it was a good choice, when in fact it wasn’t.
You also want to make sure that the account in which you put your emergency fund is building compound interest. There are several options for this. You usually want to go with online banks like Marcus by Goldman Sachs (for its high-yield savings accounts), online firms like Wealthfront (for its high-yield cash account), or money market accounts.
Make sure that your money is earning more money. That compound interest really adds up!
Get to Action!
Now you have it! You know what you need to know about building an emergency fund.
You know about its importance. You know where you can park it. You know how you can build it, and how much you should aim to put in it.
Now you have no excuse in the future to be dealing with heavy financial drawbacks; unless they catch you before your emergency fund as been fully funded. Even then, though, the money in that fund will serve you greatly and put you much closer to getting out of a financial ditch.
Now you must get to the action! Open an account where you can start adding money and get the ball rolling. Make sure your next paycheck has a portion that will specifically be going towards that emergency fund. Even if you haven’t audited your last three months, start at $1,000. From there, add what you can afford to add. If you can’t afford a whole $1,000 now, make that your first goal. From there, set another goal.
This will help you start to move forward with your emergency fund. To make sure you have something to fall into when a financial drawback arises. Get to action!
If you have any questions or comments at all, feel more than free to leave them in the section below. I will be happy to respond to each of them.