Have you every experienced a time when you needed extra money for an unexpected expense but didn’t have enough money to pay for it? Maybe car problems, you fall into the pool accidentally holding your phone, or something else that an emergency fund would have saved you from going into debt over?
Ultimately, the goal is to have 3 to 6 months of your EXPENSES saved up in a savings account that earns you interest. Everyone should have an emergency fund. Even starting with $1,000 saved for unexpected car problems will keep you from going into debt. The important point is to start today saving for an emergency fund.
I’ve had my fair share of such experiences and the money I set aside really helped me get through the issue without any anxious feeling that my finance might be at stake. With an emergency fund, you’re more likely to worry-less about expenses that come unexpectedly. This is also a great way to improve financial security.
What is An Emergency Fund?
An emergency funds is money set aside for when emergencies arise. This may be a situation where you don’t have the money to cover for the expenses you’ll be making.
These situations are often costly as well as stressful, such as:
- medical emergencies
- big home repairs
- job loss or delayed income
- car problems
Emergency funds are typically not used for big purchases planned beforehand; whether it’s a house, a car or education. The money that goes toward this doesn’t come from your “emergency funds” since these aren’t exactly urgent needs.
By having an emergency fund, you are ready with the cash to make the needed payments. Having this helps especially when there’s a tight budget.
Your emergency funds are there to help you survive financially and hopefully not make you go into debt when sudden expenses arise.
Loss of a Job
They say that it is not IF you lose your job, but rather WHEN you lose your job.
I can attest to that. I personally was laid off from my job of 10 years. AND this was just weeks after we had our 4th child.
No one ever thinks it can happen to them but it will.
An emergency fund is also in place in the case that you lose your ability to earn your income.
Throughout the time frame you’ll be looking for another job, your emergency funds will be covering for your living expenses.
However, this may vary between how much you have prepared and how long it takes for you to find a job. Some people may take longer than others. For this reason, it’s important to have emergency funds that cover as much as 6 months of living expenses.
This way, even when finding a job takes time, you’ll have enough to cover for at least half a year without income.
Emergency Fund Definition
An emergency fund is the term used for accessible money or assets that intend to help you pay for any sudden expenses, both big and small. In addition to sudden expenses, an emergency fund is also in case your income is cut or you lose your job.
The main purpose of having an emergency fund is to be able to help you get through complicated financial situations.
In most cases, certain expenses should already be prepared for beforehand, such as monthly debt, home maintenance, card and phone bills and other daily expenses. With an emergency fund, your emergency funds should still be enough to cover all these payments in case certain emergencies arise.
However, the emergency fund is not to be confused with savings.
Unlike your savings, this money is stored away mainly to cater unexpected situations that may cause problems to your finance.
How Big My Emergency Fund Should Be According to Dave Ramsey
Generally, experts recommend that your emergency funds should be enough to sustain your needs for three to six months. Dave Ramsey emergency fund plan is to start with at least $1000 for emergencies and then work your way up from there to 6 months expenses saved.
Even with a stable household and income, sudden situations may occur that could potentially put your finances at risk. Preparing an emergency fund regardless of how good or bad your life is will surely cushion you from these instances.
Living in a home with more than one person making money will be fine with about three months of living expenses. It can be split between each member for more fluidity. Therefore, the responsibility is shared between each person rather than having everyone rely on only one source.
On the other hand, the case is different for people who are self-employed or make their money in other ways than having a job.
Whether this means you’re a one-income household, self-employed, or you simply don’t have a fixed income, six months of emergency funds would be more suitable. Since you’re not making as much money, you’re emergency fund should be enough to support you with sudden big expenses.
Six months’ worth of emergency funds is also best if someone in the household has a chronic illness that would require them to visit the hospital more frequently to receive treatments.
Although an allotted amount of money should be put towards these medical expenses beforehand, it’s good to prepare some extra funds in case of a bigger emergency. This could be pricier treatments or a sudden need to conduct surgery and so.
Emergency Fund Calculation
Financial security doesn’t always come from how much money you can make. There will be times when you will have large, unexpected expenses that you will have to pay for. Being prepared for these sudden expenses with an emergency fund will help you pay for these expenses when they come up.
Every person or family will differ in how they calculate the total they need for their emergency fund. The emergency fund calculation is very simple though. Here is an example of the emergency fund calculation.
3 Months Emergency Fund Calculation
Total Monthly Expenses X 3 = 3 Months Expenses to Save
$3000 x 3 = $9,000 saved in an emergency fund
6 Months Emergency Fund Calculation
Total Monthly Expenses X 6 = 6 Months Expenses to Save
$3000 x 6 = $18,000 saved in an emergency fund
The best way to calculate your emergency fund is to look at your monthly expenses and come up with a total amount. Since each person or family will be different, you will need to come up with all your expenses by reviewing your credit card statements, bank statements, and monthly receipts.
Calculating the right number for your emergency funds depends on how much you spend monthly, from big payments like debt to small payments like groceries.
Usually, the following is considered to identify how much you’ll need for a month:
- rent or mortgage payment and insurance
- auto loan and insurance
- transportation costs
- household bills like electricity, water and gas
- home maintenance
- phone and internet bills
- medical expenses
- groceries
- toiletries and personal care
- clothing and other necessities
- miscellaneous like gifts
Including a few more extra dollars for entertainment and leisure purposes is fine as well.
Add all these expenses together to find your total expenses. For example, the total monthly payments is equal to $530. To make sure you could take on bigger payments, your emergency funds should be enough to cover more than what you need if not equal.
The goal of your emergency fund should be 3 to 6 months of expenses saved for emergencies.
Keep in mind that your monthly expenses can increase and decrease over time. If you no longer need to pay for your car, you’ll be saving that money every month.
Preparing yourself for the worst-case scenario beforehand gives you flexibility in dealing with expenses even after already taking out a large sum of money.
Where Should I Keep My Emergency Fund?
It’s best to keep your emergency funds easily accessible.
A checking account that comes with a debit card or check-writing is one way to quickly pay doctors or mechanics without too much thinking involved.
I personally keep my emergency fund in a bank that give a good interest rate. Currently, the best place I have found is CIT Bank. The interest has been as high as 2.45% for your money!
You could also opt for a savings account wherein you can easily transfer money or use a card to make payments online or in-store.
Quick and easy access to the money is important, however it would make more sense to separate your emergency funds from your main bank account. That way you wouldn’t be tempted to take out funds from it for small daily expenses.
Also make sure to choose a bank you’re comfortable with so you know you’re money will be in safe hands.
How Much Should A Millennial Save?
Preparing an emergency fund sooner makes it easier for you to withstand unexpected financial expenses, big or small. In addition to this, it’s also important to keep track of your savings. This will allow you to live comfortably after your retirement even when it’s still far off.
Saving up for retirement as soon as you can lead you to a financially comfortable life. The same applies to building your emergency fund.
Experts state that millennials should have saved money equivalent to their annual salary by the age of 30. Five years later, it should be twice the annual salary. Five more years later at the age of 40, it must be three times the annual salary and so on.
Hearing this, it may sound overwhelming if you are just starting out working a job.
However, a typical millennial has a long way to go to reach their goal. At the same time, they have a lot of time to build up their savings.
This can start by putting away a few dollars to your savings depending on how much you can afford to save every month. Whether it is $30 or $70, it would work. The point is to just start saving.
After this, you can slowly work your way up until you reach maybe 10 to 15% of your target by the end of the year.
The goal doesn’t always have to be a fixed rate at a certain age. If you’re starting off a little later than others, for example at the age of 36, your target can skip straight to saving up thrice before you reach the age of 45.
You should give yourself ample time to make progress rather than rushing in a short period to prevent yourself from experiencing further financial crisis. So you should start saving now instead of putting it off for when you are older.
Examples of Emergency Fund Needs
What would you need your emergency fund for and how much emergency fund money should you have saved to be safe? No matter how much emergency fund you may have, even just $1,000 will help when sudden expenses come up. Having an emergency fund will come in handy for times like these.
- Medical Expenses
- Car Problems
- Home Repairs
- Job Loss
- Sick Family Member
- Security Deposit when Moving
- When Things You Own Break
There are a lot of instances where you’ll have to keep an emergency fund prepared, just in case.
This doesn’t mean being $8 short on buying a new outfit, or lacking $3 to order food. Your emergency funds should be spent on bigger situations such as:
Medical expenses
An illness can come up whenever. Often, it’s at a time we expect it the least. These can be more than just the regular flu, which might require you or a family member to visit the hospital or get treatments. Accidents can also occur that may or may not involve major injuries.
Say you have accumulated an emergency fund good for about five months. Medical expenses can get quite pricey depending on what needs to get treated.
There would be a lot of payments to be made. Costs for the doctor, the hospital room, the medicine, and other miscellaneous things that were part of the process.
For example the total of all these payments are equal to about three months of your emergency fund. Because you have enough for five months, you’ll be able to easily pay these bills while still having emergency money for two months.
Car expenses
Experiencing problems with your vehicle is something common with most people.
This ranges from a car wreck, a flat tire, maybe even a broken window.
Usually, it takes a lot of money to get a car fixed depending on the problem. If you’re someone who uses your car very often, this would be a big problem for you.
With an emergency fund, you could get these repairs done quickly without having to stress yourself over taking put more loans just to get the car fixed up.
Home repairs
A home is definitely the most comfortable space you can be in, especially if it’s your own. That is until bigger problems start to spring up with the HVAC system that would make you wish you didn’t have to deal with them yourself.
There’s a lot of things inside a home that require regular maintenance checking to prevent any problem from reoccurring in the future.
Although these are things that you should have prepared for already, some situations will need you to spend a big amount to restore the home’s condition.
A storm is a common reason homes need major repairs. It could be due to a tree falling over and hitting the roof too strongly, or maybe a water pipe breaks because of something heavy crashing onto it.
Sudden experiences like these are where you should put your emergency fund towards, rather than for expenses you have already calculated for.
Job loss
It’s not always that you can predict when you get laid off from your job.
For some people, it takes a longer time to find a new job because of their career path. This is mostly the reason why experts recommend having an emergency fund that will last you as long as possible.
Throughout the period of time you’ll spend hunting for another job, with no income, you won’t be able to pay for even living expenses unless you have an emergency fund to cover for it.
This way, you won’t have to deal with the stress of dealing with daily expenses the same time as trying to land another job.
Emergency Fund vs Savings
While emergency funds and savings have the similarity of being a cushion for major financial problems, they are different in a lot of ways.
Emergency funds keep you from taking out huge amounts of money in debt to quickly pay for urgent expenses. The amount varies, but usually this is used for bigger payments.
This should be liquid so you could easily gain access to it whenever it’s needed, especially if the case is in need of immediate action.
On the other hand, savings focus on generating returns for you.
Usually, people invest their savings to let them grow. Although they can be liquid, it’s not as easy to take this out. If it was out towards investments, it would be in the form of stocks, bonds, real estate and the like.
Emergency funds are made to provide for sudden needs in current time, while savings are set aside to be used in the future.