Emergency Funds
What is an Emergency Fund and why do I need one?
An Emergency Fund is defined as cash that you have set aside in case of an unplanned expense. An emergency would be something like a job loss, emergency room visit, a major car repair or your car getting totaled after an accident. Statistics show that around 25% of Americans don’t have any money set aside for emergencies. This is alarming and I believe how some people end up in credit card debt.
How much should I have in an Emergency Fund?
The answer to this question is not the same for everyone. If you are a young adult and have parents who are helping to support you, you may be able to get by with only a few hundred dollars in your emergency savings. At a minimum, most people should have at least $1,000 for minor emergencies. Generally, we look at your monthly basic living expenses to see how much your emergency fund should be. Basic living expenses would be things like mortgage or rent, food, gas, car payment, insurance. They are the things that you couldn’t live without or would put you in jeopardy of losing your home or car if you don’t pay them. You would not include the “extras” in this number such as entertainment, gym membership, travel or other things that you likely would cut out if you had a job loss or other financial emergency. Single people or those without kids or other responsibilities may only need 3 to 6-months’ worth of expenses in their Emergency Fund. A married couple with kids may want to hold at least 6 to 9-months’ worth of expenses in theirs. It really depends on your personal situation and what you are comfortable having.
How do I set up an Emergency Fund?
If you don’t have a separate account, I would recommend opening a new account. This could be at the same bank you already have an account in, or a new bank. I like to use Ally bank (online) for this because their interest rates are generally higher than brick and mortar banks. Keeping the money separate from your other accounts makes it more difficult to dip into it on a regular basis. I don’t recommend putting this money in something that is not liquid like the stock market or bonds. Regular or high-yield savings accounts are usually the most accessible.
Where do I get the money for an Emergency Fund?
If you don’t have the money to set aside at least $1,000 in your Emergency Fund there are some ways you can get a quick cash infusion. You could sell things online like crafts, woodworking, extra furniture or old electronics you have lying around. You could have a garage sale, offer to babysit, pet or house sit for friends and family, work extra hours or find a side gig, or donate plasma. Otherwise, setting aside a small amount from every paycheck, even if it’s just $25 or $50 per pay is the best way to get started.
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