Imagine you’re driving to work on Monday and all of a sudden, you feel the car start to shake and you know what is happening. You have a flat tire. As you pull off to the side of the road, your child’s school calls to let you know that little Timmy broke him arm and is heading to the emergency room. And as you frantically call your spouse to tell them about your flat tire and your broken kid, you drop your phone on the pavement and it cracks into a million pieces. And remember, it’s only Monday. Now where is your Emergency Fund!?
While the chances of all three of these things happening nearly simultaneously is slim, the chance of one of these things happening is fairly common. And yet, if one of these things were to happen, would you have enough money saved up to comfortably cover the expense that would inevitably follow it?
Unfortunately for most Americans, the answer is no.
According to a survey conducted by Bankrate, roughly ¼ of adults in the U.S. have no savings at all. And while it seems nice that the other ¾ Americans do, data shows that it would not be enough to really cover an emergency. Nearly 60% of those surveyed had less than $500 in their savings. Chances are you will be spending more than $500 for that new phone or covering your insurance deductible.
We can all agree that that stuff happens. It is not a question of if a surprise expense happens, but when. So it is time that you are prepared.
What is an Emergency Fund?
An Emergency Fund is a financial safety net to catch you when life knocks you off track. It is a very liquid account that you can have quick access to so you do not need to take on credit card debt or borrow money from family.
What is NOT an Emergency Fund?
An Emergency Fund is not:
- Your savings to buy a house or a car
- Tuition or student loan money
- A crazy amount of money
- The same thing for every single person
How Much Do I Need to Save?
The amount that you need to save is going to be different based on your circumstances. Some financial experts recommend that you save between 3 and 6 months of your monthly expenses. This would provide some relief if you happen to lose your job and need some time to get another one. This could be easy if you have lower monthly expenses and have a job that you could easily find a similar replacement. However, if you have higher fixed expenses and work a specialized job, it may be a better idea to provide a bigger cushion to fall back on. Check out this Emergency Fund Calculator!
Even if you only have $2,000 worth of expenses per month, saving $6k can seem really overwhelming. The best thing to do is to set smaller and more obtainable goals. Start with a goal that you could obtain within 6 months, even if that amount is only $500. Having just that little bit saved can really help in a jam.
Where Do I Keep It?
The best place to keep your Emergency Fund is in a savings account that has a decent interest rate. Your main concern with your Emergency Fund is to keep it liquid and highly accessible. It’s not a good idea to put your Emergency Fund in investments like CDs, bonds, or stocks. While you should get a good interest rate, you want to be able to access the cash as soon as you need it.
I personally use the Barclay’s Dream Account to hold my Emergency Fund. You can easily connect your bank account and can even set up automatic transfers into the account. It has a great savings rate, one that heavily exceeds what your normal brick-and-mortar bank can offer.
How Do I Build My Savings Account?
- Set up a small but fair amount to automatically transfer into the savings account the day after your paycheck hits your bank account. PAY YOURSELF FIRST!
- Save your change! All of those loose nickels and dimes will add up quickly!
- If you don’t carry a lot of change, try online apps that will round up your transactions and transfer that amount into an account for you! For example, you spend $4.21 on a coffee. Apps like Acorn and Digit will transfer the remaining 79 cents into a separate account.
- Sell some of your old stuff of Craigslist, eBay, or Facebook
- Sell some of your family’s stuff (I’m sure they will give you a cut for doing the work)
- Side Hustle it! Think Uber, Lyft, Etsy, babysitting, dog walking. Get creative!
- Transfer any money that you have left at the end of the month! The day before your paycheck clears is a great time to see how much you have left to work with.
- Your tax refund is a great lump sum of money to work with! You’re already not used to having it, so invest in yourself instead of meals out or drinks on the weekend!
Let’s Wrap It Up!
Remember, this is an emergency fund. This lump sum of money that you are going to work hard to create is not to be used on a vacation you want to take, a last minute birthday present, or a rainy day resource. This is for emergencies only!
While it can be hard to change your financial habits, especially whenever it already feels that your account is tight, investing is yourself is the most important thing you can do. Cut your expenses, automate your savings, and stick with it. Build it slowly and keep it going. And let us know how you are doing on the Facebook page or in the comments below!