If you’re just starting to turn your financial life around, you may not yet have heard about an emergency fund or why you need one. I don’t blame you either, because unless you like to read financial news for fun chances are you wouldn’t run across emergency funds in everyday conversations.
What Is An Emergency Fund?
An emergency fund is basically a stash of cash that can bail you out in case of an emergency. This money should be kept in a liquid (accessible) form should you need it in a hurry.
I personally keep my emergency fund at an online savings account because it keeps it accessible enough that I can get my money in a couple days, but it is hard enough to take money out to keep me from splurging on a non-emergency.
How Much Money Should You Keep In Your Emergency Fund?
There is no set standard for an amount of money for an emergency fund. Financial guru Dave Ramsey suggests just a $1,000 emergency fund until your debts are paid off while another financial guru, Suze Orman, suggests an 8 month emergency fund. Trent from The Simple Dollar suggests 2 months of expenses per dependent. As you can see, different people set different requirements for their emergency funds.
You should have an emergency fund that is a comfortable amount for you should something horrible happen. Your emergency fund will need to get you through rough times financially without you having to worry about going into debt or wracking up a massive credit card bill. If you need it for a real emergency, use your emergency fund.
If you have a very specific job that doesn’t have a lot of demand, you might need to have a larger emergency fund because it would be harder to find a new job. However, if you have a job that is in high demand then you might be able to get away with a smaller emergency fund.
What Is Considered An Emergency
The only reason to use money out of your emergency fund is a true emergency such as job loss, unexpected medical bills, an emergency breakdown of large equipment and other similar things. Unfortunately, many people make up excuses to drain their emergency funds for other non-emergency purposes.
What Isn’t An Emergency
No, buying a pool for your house is not an emergency and neither are a bunch of other common excuses to take money out of your emergency fund. Other things that aren’t emergencies are your 6 month insurance payments you forgot about, Christmas gifts, car registrations, property taxes and other similar things you might think would be a good excuse to pull money out of your emergency fund.
Draining your emergency fund for a non-emergency can be a huge mistake. If you decided to splurge, with the best intentions of replacing the money as soon as possible, and then you lose your job right after your splurge you’re in deep trouble with no financial back up plan.
Why Having An Emergency Fund Is Essential
An emergency fund is essential because it can save you from going into debt when something bad happens. If you’re following the most popular budget in America, living paycheck to paycheck, the smallest little hiccup can be the difference between making it to the next paycheck and going into debt.
When you have your secret stash of cash, or emergency fund, you can survive the problem without going into debt and incurring interest charges that you can’t afford. Instead, you can earn interest, even if it is a small amount, and set yourself up to take the next financial steps in your life. Without your emergency fund you’ll always be fearing the next unknown emergency or visit from your friend Uncle Murphy.
Do you have an emergency fund? If so, how did you determine how much to keep in it? Are you comfortable with your current emergency fund or do you wish it was bigger?