Not Having an Emergency Fund Is the Emergency

 

Not Having an Emergency Fund Is an Emergency

    Not having an emergency fund is, in itself, an emergency. Even a starter fund of $1,000, $1500, or one month of expenses is better than not having anything set aside for emergencies. While this starter fund won't cover every situation, it will help soften the blow of any financial speed bump while trying to get out of debt. 

    Without an emergency fund, the only option during a crisis is to take on more debt, worsening your financial situation.   

Why You Need One (and How Much to Save)

    As mentioned above, a starter emergency fund of $1000 is a great goal. The recommended emergency fund should cover 3-6 months of expenses, but for some, especially those close to retirement age, could extend to 24 months. 

    The most important factor of what should be in your emergency fund is what makes you feel financially secure. Personal factors such as the following should be considered when deciding on an emergency fund amount:  

• job security
• family size 
• monthly expenses (fixed VS. variable)
• length of unemployable 

There are plenty of other factors that could persuade you to have a larger or smaller emergency fund, the key take away is that you have to determine what makes you feel financially secure keeping in mind the common recommendations. 

    Your emergency fund should be stored in a separate account that isn't as easily accessible as your primary checking or savings account. Ideally, this should be a liquid account meaning you have access to the funds as a cash asset and there isn't any stipulations on the money (e.g. you have to sell stocks, or have to request access through another individual).

When to use the Funds? 

    You guessed it.....emergencies. But who decides what an emergency is? You (and possibly your significant other) are in control of the account and what to use the account for. 

Some examples I've seen people utilize their emergency fund for would include:

•  unexpected car maintenance
•  health care 
• last minute travel to visit sick family or funerals 
• cover bills while unemployed.

I have also seen many individuals and families having to take out debt or utilize high interest credit cards to cover these expenses. The utilization of high interest debt for these costs only puts you further into a financial struggle. Emergency funds shouldn't be used for:

• new vehicles
• homes
• planned maintenance

These costs should be factored into your monthly budget or  have its own savings goal on your savings goal tracker.

    

How to Start Your Emergency Fund (Even if Money’s Tight)

   Now starting your emergency fund could seem like a daunting task. The truth is you can just start with what you can and slowly grow your fund over time. Setting a savings goal of $100, $500, or more is up to you and can start off with saving only what you can at first and build up over time. If you have already taken the first few steps into financial freedom (first one being to decide to go on this journey, and second assessing your financial situation) then you should have an idea of what is able to be saved once your expenses are paid. Start with only making the minimum payments on your debt to be able to put your surplus towards your first savings goal, your emergency fund.

    Once you get your starter emergency fund funded then it's time to move on to attack high interest debt. The ways to attack your high-interest debt will be addressed in future blogs so stay tuned.