Emergency Fund, Emergency Savings, Rainy Day Fund… what are these? What are you talking about?
Emergency, shmergency
Alright, let’s get right to it. You need a small (relatively) fund that you can dip into should and emergency occur. Why the bold!? It’s an emergency fund. I am talking about a fund that is only used for emergencies, where you cannot afford to not dip into it, and you cannot see a reasonable time frame for getting something fixed.
So, what exactly would you define a financial emergency? Here are some example situations, but not an exhaustive list by any means.
- Job Loss
- Marriage – such as marrying into debt and having to suddenly repay debts
- Divorce – separation will cost you more than staying together
- Natural disasters – Tornadoes, hurricanes, floods, fires, etc
- Death of spouse/partner – no one wants to think this will happen, but let’s be prepared for it just in case
- Major medical emergencies – broken bones, severe illness, pet health emergencies
- Immediate Home Repairs – burst pipes, small kitchen fires…
Some Examples, featuring: Bob
- Bob. Hi Bob. Bob has no emergency fund or any savings built up. Bob’s car develops a nasty sound from the engine and his Check Engine Light (CEL) has come on. He takes his car to the shop and is quoted $800 of labor and parts to fix this mysterious engine issue. Bob cannot pay to have his car fixed from his own pocket (bank account) and thus is left without a car, and likely without a way to get to and from work. He’s shit out of luck. Bob now has to either seek a loan (shudder) or seek out money from friends and/or family. Bob is in debt now.
- He has $1,500 set aside in an emergency fund. Bob develops that same nasty engine sound and light from above. Bob can now pay the mechanic the $800 from his pocket, and continue working in a few days, after bumming rides from someone. However, Bob doesn’t budget well enough to repay his emergency fund the $800 he paid to the mechanic. Bob now only has $700 for an emergency fund with no plan to repay this.
- Bob. Again?! Bob, what’s going on here?! Bob has made some excellent choices recently and has saved up $1,500 as an emergency fund. He has a bit of wiggle room in his monthly budget to repay any emergency expenses that come up, such as the $800 car fix above.
So there are 3 examples of different situations that Bob could be in. Obviously, those are not an exhaustive list of situations, but you get the point. The whole idea behind having an emergency fund is to be able to afford emergency expenses when they pop up. I like to think that having an emergency fund is like a cushion against disaster. In some cases, a car is a necessary evil because someone has a long commute to work. Other people may not have a long commute to work and thus could decide that they don’t want to spend the money right now, will save up for the fix, and then pay the mechanic later. This applies for many more situations than just a mechanical fix for your car. These situations could be health, transportation, home repair related, and many others.
Suggested Emergency Fund Size
Dave Ramsey suggests in his Baby Steps plan to build up $1,000 for an emergency fund as your first baby step. I don’t disagree with this at all. $1,000 is certainly a meaningful amount of money to be able to afford a mishap without wrecking your monthly finances and getting behind on bills. However, I am suggesting that you put aside what you can reasonably come up with in 1 or 2 months. I suggest somewhere between $1,000 and $3,000 to put into an emergency fund. This way, the more you have, the better positioned you are to being able to cover your emergencies.
For my family and I, we have chosen to stick with a $4,000 emergency fund. We are a family of 4 and this is a suitable emergency fund for us. We also have a plan that when we are done contributing towards this $4,000, that monthly allocation goes towards something else. In this case, we are also trying to save up for a house so that we can stop renting. By approaching our budget this way, we have the ability to dip into our emergency fund (if absolutely necessary) and then pay it back over 1-3 months time without meaningfully impacting our monthly bills and allocations.
What Works For You?
You have to figure out what makes sense for you and your family. I cannot tell you that you need exactly $1,500 saved up in 2 weeks or else. (or else what? I’m going to write about you??) My point is that I certainly want everyone to get to the point where they are less stressed about their finances. By having an emergency savings built up, you should start to ease up on stress and continue thinking about how you want to approach your finances to get into a significantly better position.
Want to bump up your emergency fund but don’t have the extra income from your regular job? Try signing up to Fiverr, figure out what you can sell, and make some extra cash. Just realize this, you don’t have to sell something new and innovative, selling services that are already being sold is perfectly reasonable and proven.
So how much of a rainy day fund are you going to save up? How soon can you get there? Let me know what your thoughts are on this in the comments below.
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