What is an Emergency Fund?

What is an Emergency Fund?

 

What is an emergency fund and why do I need it? If you are just starting to research how to fix your fiances, or budgeting then an "Emergency Fund" might
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What is an emergency fund and why do I need it?  If you are just starting to research how to fix your fiances, or budgeting then an “Emergency Fund” might be a new term for you.   This was a new term to me years ago, and I still have a small difficulty putting the answer into the most eloquent but simple form… so I’ll let the experts teach you!

What is an emergency fund?

…a reserve of three to six months of expenses that you set aside to cover any sudden costs such as a car wreck, hospital visit or leaky roof. -Dave Ramsey

….account used to set aside funds needed in the event of a personal financial dilemma, such as the loss of a job, a debilitating illness or a major expense. -Investopedia

…a rainy day fund. -MoneyUnder30

Why do I need an emergency fund?

The easy answer…You do not know what will happen in life.

First, it is an emergency fund provides you with security.  If an event were to arise which would cost you $3000 what would you do if you didn’t have the money?  Take out a loan with high interest rates?  Borrow from a friend?  Mortgage your house?  An emergency fund provides you with a “cushion” which allows you to pay that money without going into deeper debt.

Furthermore, what happened if you lost your job tomorrow?  How would you pay for food, gas and living for the next month?  An emergency fund will help with that.

How much should I have in my emergency fund?

While there can be a variety of emergencies varying in how long the last, a typical emergency fund is enough money to cover ALL of your bills for 3-6 months.

The more stable your money and household situation is, the less you need in your emergency fund. – Dave Ramsey

If you have a sable job, and are a two income home, then you could lean more towards 3 months in savings.  An unstable job, or a single income family will put you in a more difficult position should an emergency arise, and you’ll want closer to a 6 month fund.  Also, if there are people in your home who have chronic medical conditions, or a home and car that need a lot of “love and attention” you’ll want a larger emergency fund.  Still not sure that emergencies will happen to you?  Read this about why you need to be prepared for emergencies.

Where should I keep it?

A place where it is easy to use.  The best option is in a bank account that you can use a check or debit card to pay with.  If it is too temping to take money out, you may need to make this account separate from your every day expenses, or even a competently different bank.

Cash in a fireproof safe is a good place if you know you will leave it and forget about it.  If using cash make sure it’s in smaller bills.  But, if you are someone who pays with cash and will use it, then perhaps a bank account will be the better choice.

What is an emergency?

sudden, urgent, usually unexpected occurrence or occasion requiring immediate action.  A state, especially of need for help or relief, created by some unexpected event

-Dictionary.com

Ask yourself these questions (per Dave Ramsey):

  1. Is it unexpected?
  2. What is the urgency?
  3. Is it necessary?

Can you justify the use of $3000 or more you need to spend as an “emergency” 5 years down the road?  Will you be glad you spent that money?  Or will you be regretting you spent that money because a more important life threatening emergency came up?

Talk with your spouse.  Sit, think, and discuss the “emergencies” that might arise in your life.  How you can prepare now for them?  Then, when the time comes, you will be able to determine what is or is not an emergency.

Finally, an emergency fund is NOT used to make planned purchases such as a new care OR needs to be a HUGE amount.  It’s a fund where you start small and build on it.  Any little bit you have when an emergency arises WILL help.

In conclusion

now that you know what an emergency fund is, and WHY you need it, it’s time to build it.  Check back next week, or subscribe here (to get it sent to your inbox) to learn How to Build an Emergency Fund.

What is one thing holding you back from starting or building your emergency fund?

Further Reading

How to Create a Budget in 4 Easy Steps

How to Make an Emergency Plan

Resources:

Dave Ramsey
Dictionary
Investopedia
MoneyUnder30

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Thanks for reading!

 

This post may contain affiliate links.  Read my affiliate link disclosure here

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