My family vacations to the lake each year. Since I can remember, we filled our SUVs full of supplies, hooked up our little 1980 speed boat (that threatens to sink each year, and nearly has at least twice) and headed out the short 30 miles to the lake. Several years ago, my dad came home the week before our annual camping trip with two blue kayaks in the back of his SUV. My dad is a real DIYer, and that week he built a roof rack to top the SUV to carry the new, lightweight kayaks.
When we were ready to go, my dad set out first, towing the fully packed SUV, boat, and kayaks, while my mom and I followed behind him in the Nissan. As we turned on the rural Kansas highway, we noticed the kayaks started to wiggle out of the cargo straps. Anticipating what was about to happen, we attempted to call my dad to pull over to adjust the kayaks. But, we were too late. The strap of the kayak wiggled off completely, and before we knew it, the wind carried the left kayak up off of our vehicle and just narrowly missed a small black sedan traveling in the other lane. Thankfully everyone was okay, and there was no damage to the innocent driver caught in the middle of our intrepid lake expedition, nor to the kayaks (besides some deep scrapes in the side of the kayak that are still there today, of course).
Do you ever feel that financial setbacks come flying out of nowhere and just smack you in the face like a rogue kayak on the highway?
For my husband and me, 2019 felt very much like that.
The $1,500 car repair…Whack.
The $800 root canal. Kerplunk.
The $1,000 puppy eye surgery… Thud.
Maybe for you, it wasn’t any of the emergencies we experienced. Maybe it was a job loss, a hospital bill, or a global pandemic that set your financial world on its head. Crack.
The point is, financial emergencies can come from anywhere, at any time, at any amount. One big step towards true financial stability is establishing an emergency savings fund to help you weather some of life’s unexpected events.
An emergency fund fixes your emergencies.
I like to call the emergency savings account the “fix-it” fund. It allows you to pull funds from savings to “fix” whatever financial emergency you might be facing, without jeopardizing your monthly budget or sacrificing forward progress on your financial goals. When you have money in the bank to fix the car or repair the plumbing, all of a sudden, the panic and stress from the initial problem onset slowly disappears because you know that you can cover that expense. An emergency is no longer an emergency but a small annoyance.
An emergency fund keeps you from being an unexpected borrower.
Perhaps the most important reason to have an emergency fund is the safety net it provides you in your larger financial picture. If you don’t have money set aside for emergencies, its inevitable that you will turn somewhere else (credit cards, loans, etc.) that will destabilize your financial situation. Imagine you are working so hard to get out of debt and a $1,000 car repair threatens your income because you can’t get to work, but you also don’t have money to pay for the repair. With no other options, you may turn to a bank loan, or worse, a payday loan with extremely high interest, to pay for the repair. This puts you into more debt and creates a setback in your big picture goal of becoming debt-free. Plus, imagine the added stress of having to fill out paperwork and complete a loan application process in the middle of an already high-stress situation.
Having at least some fix-it funds set aside can decrease the likelihood of you becoming an unexpected borrower.
So, how much should I save for emergencies?
Financial experts in the field suggest having 3–6 months of expenses in a savings account to have a fully-funded emergency fund. Dave Ramsey expands on this and advises at least $1,000 set aside for emergencies at all times. However, if the pandemic has taught us anything, it’s that how much we need in our emergency funds is not a one-size-fits-all template.
Here’s what I suggest when considering the amount for your emergency funds:
- Consider your stage of life.
- Are you in college? You might have a great family support system that can help in a pinch. A $500 or $1,000 fix-tt fund might be sufficient for you. If you are the breadwinner with little mouths to feed, you may consider a more padded fix-it fund. The question to ask yourself is, If I lose my income, what supports are in place to help me, and who is dependent on my income?
- Will you base your estimate on basic expenses, all expenses, or the monthly cash needed to run your normal budget?
- For example, if I have $1,000 of basic needs per month, I might strive for $3,000 in my 3-month fix-it fund. However, if I want to continue a sense of my normal lifestyle, like eating out, I might include ALL my expenses of $2,000 per month. This bumps up my 3-month fix-it fund estimate to $6,000 vs. $3,000. Moreover, if I wanted to make sure I was still donating to charity, paying extra on the car, etc., I might budget my fix-it fund to encompass the entire $3,000/month, and my 3-month fix-it fund goal is now $9,000. The question to ask yourself is, If I lose my job today, what quality of life do I want while unemployed?
- If my main source of income is gone, how long do I want to be able to live off of savings?
- If you are a single income household or your job is more seasonal (like a construction project), you may want to consider a fix-it fund with closer to six months of expenses in it. However, if you have two incomes or an incredibly stable job, you might be okay with having three months of funds set aside. The question to ask yourself is, If I lose my job, how long will it take me to find a comparable (or better!) job?
Where should I keep my emergency fund?
Emergency fund savings are meant to be put in a bank and left untouched until there is a real* emergency. So, you’ll want to choose an account that earns interest. A savings account is a standard choice. A high yield savings or money market account would be a better choice as you will make more interest per year on your funds. You can also contact your bank and lock in a Certificate of Deposit (CD) for emergency funds. Yes, there is a slight penalty for withdrawing funds, but in a true emergency, the small penalty would be the least of your worries. Plus, you can choose short-term CDs to start that automatically roll over to a new CD to mitigate some of the penalty concerns should you need your funds sooner than expected.
*An important note: Real emergencies are unexpected events. For example, Christmas comes on the same day every year. Do not use your emergency funds for presents. Poor planning is not a good reason to spend the emergency fund.
What if I am terrible at saving? Can I do this?
Yes! Even if you strive to put away $5 per week, you are investing in your future self. Consider setting up an automatic deposit from your paycheck into your savings account. Just ask HR to make this simple change for you! Or, better yet, send those automatic savings to a bank that you don’t use for your primary banking services. Out of sight, out of mind may be your best strategy to build savings. Don’t forget about CDs as savings vehicles here too. The small penalty may be enough to deter you from touching those funds.
The bottom line:
All in all, the amount in your emergency fund, where you store it, and how you fund it are details for you to decide in your specific situation. However, the need for an emergency fund is universal. This savings account is your guard against flying financial kayaks threatening to hit you.
Your security blanket.
Your “oh, crap what are we going to do” fund.
Prepare today, for unexpected financial events tomorrow.