You often hear the advice, “You should have 3-6 months in your emergency fund outside of normal savings,” but what exactly does that mean? What is supposed to be covered in an emergency fund? And when do I choose to use that money?
- Who should have an emergency fund?
- Anyone with any type of monthly recurring expenses: groceries, a car, insurance, a home, debt of any kind, a body, etc.
- Why is an emergency fund important?
- When surprise expenses come up you don’t want to have to rely on high-interest credit cards or loans.
- When life takes an unexpected turn and you have to cover life’s essentials for a period of time.
- Even if you have debt, it is important to have an emergency fund to avoid further debt.
- What is an emergency fund for?
- Major car repairs
- Unexpected home repairs
- Appliance repairs or replacement
- Leaks
- Outdoor issues
- Unexpected medical or dental expenses for yourself, child or pet
- Where do I keep these funds?
- Since an emergency can happen at any time, you want these funds to be readily accessible.
- A “high-yield” savings account is great because it is federally insured up to $250,000. While interest rates are not amazing right now here is a great resource for finding some options out there:
- How do I know how much to put in an emergency fund?
- The amount every person or family needs is unique to them. If you are in an emergency, you should immediately cut back on non-essentials and focus on spending for survival, not for pleasure.
- Ask yourself: If I lost my job today, how long will it take me to get a new, comparable position? This should be the minimum timeline. Financial experts typically say you should save at least six months to cover essential expenditures, but any amount is better than zero.
- Here are some key areas to look at for guiding your calculations:
- Housing
- Rent/Mortgage
- Insurance
- Property Taxes
- Utilities
- Cell phone
- Internet
- Gas, electricity, water
- Trash
- Home repairs
- Transportation
- Car lease/loan payment
- Car insurance
- Car registration
- Gas
- Public Transportation
- Parking, tolls, other expenses
- Food
- Groceries
- Dining Out: Should be limited in emergency times
- Health/Medical
- Health Insurance
- Prescriptions
- Life Insurance
- Recurring Payments
- Credit card payments
- Student Loan payments
- Other debts
- Other essential expenses
- Childcare
- Pets
- Ask yourself what you absolutely cannot live without or can cancel quickly in a time of financial stress. Add a line item here
- Housing
- Your emergency fund savings goal should include covering the above at a minimum. Ideally, you have a separate savings account for other goals in life, like saving for a house or vacation.
Remember having an emergency fund can mean the difference between weathering a short-term financial storm or going deep into debt. Save yourself some of the stress in what will be a stressful situation and start preparing today.
