Imagine you’re having one of these really bad days. The car won’t start and you need a tow and an expensive trip to the mechanic. You’re on vacation lounging by the pool snapping a pic and you drop your phone in the pool. Leaving it in rice isn’t going to salvage this one. There are downsizing rumors going around, your boss wants to see you in her office, and it turns out you are about to lose your job. Unexpected things like this happen all the time. Surprise expenses or surprise lack of income can happen. Are you prepared to cover these unexpected costs? You can be, with an emergency fund.
What is an emergency fund?
An emergency fund is money easily available, like cash or money in a checking or savings account, on hand for unexpected necessary expenses. Let’s say your car broke down and you need to get it fixed in order to get to work. You can use money from your emergency fund to pay for the repairs. An emergency fund is not for unnecessary expenses. For instance, you just got an email saying that your favorite shoe store is having a sale. You don’t need any new shoes at the moment, but one pair catches your eye. Don’t dip into your emergency fund for that. Instead, wait until it fits in your budget or until after you save up for it. Leave that emergency fund alone unless it is an actual emergency. Because who knows what surprises tomorrow will bring?
How much do I need?
Aim to save enough to cover 3 to 6 months of expenses. Add up how much you normally spend in a month, including the cost of housing, transportation, food, and utilities. Multiply that by at least 3 and up to 6 times. That should be your goal of how much to save and set aside for emergencies. So if you normally spend $1,000 a month on all your regular expenses, then you should have $3,000 – $6,000 saved. If that seems like a lot to save and not be able to spend how you want, don’t despair. Work your way up to it, putting aside a little bit each month.
Why do I need one?
To answer this question, let’s assume what would happen if you don’t have an emergency fund. You might decide to put the expense on a credit card. If you cannot pay off the total balance at the end of the month, you will incur and owe interest. You’ll end up paying much more in the long run rather than if you’d had the money available at the time of the expense.
When you are between jobs, whether you left for something better voluntarily or involuntarily, incoming money dries up but the bills keep coming. Having money on hand will help bridge the gap of time without a source of income.
Maybe you are employed and your income varies from month to month. Income might vary based on the number of shifts you work, or how well you do in tips. If you are sick and cannot work temporarily, this could also affect your income. If you are in a lean month and your income doesn’t quite cover the bills, having an emergency fund can offer short-term support.
Having an emergency fund can help you avoid debt and interest, save you money, and give you peace of mind. Do you have enough saved if you have an emergency expense? How much do you need to cover your regular expenses for 3-6 months? Will you set that money aside so you are prepared?