The Emergency Fund: What Is It and Why Should I Have One?

It’s not a matter of if an emergency will happen, but when. Murphy’s law (if something can go wrong, it will) will strike. Instead of taking on additional debt to be able to swing these expected, yet unexpected events, an emergency fund can help see you through these stresses. You can build this “buffer” from your budget by either reducing your discretionary expenses or increasing your income.

An emergency fund is money you have set aside in a savings account to help you cover those emergency situations that happen in life. An emergency includes things like a leaky roof, a trip to the hospital, “holy shit I blew a tire”, or worst of all, unemployment. Emergencies do not include buying new shiny toys or paying for a day trip to get out of your city/town.

There are two types of emergency funds. There’s your regular emergency fund, and then your fully stocked emergency fund. This post talks primarily about the regular emergency fund because 40% of U.S. citizens can’t swing a $1000 emergency, so it’s best we start with the basics.

Why is an emergency fund important?

Establishing an emergency fund will give you the freedom and peace of mind when an emergency arises. Using your emergency fund means you won’t have to borrow money via your credit card, take out a personal loan, or borrow money from others like peer-to-peer lending sites (all which can have pretty hefty interest price tags).

How much should I save in this account and where should I keep it?

Money experts have different opinions on what this amount should include. Financial experts like Rachel Cruze (Dave Ramsey’s daughter) suggest a “baby” emergency fund of around $1000 to start. If that seems too daunting, you can start at a smaller amount of around $500, you just have to pick a reasonable number that you expect an emergency may cost.

What works for me is having about one month of necessary expenses in my savings account tied directly to my checking account–that way if there’s an emergency, I can quickly transfer the money between accounts. Some financial experts argue that this fund should be in a separate account outside your regular financial institution so you aren’t tempted to spend it, but if you run into an emergency, your mechanic or contractor won’t wait two to three business days for your transfer to happen for payment. Your fully stocked emergency fund (we’ll talk about this later) should be in a separate high interest bearing account separate from your regular savings and checking account.

It may seem stressful to transfer a big chunk or all of your money in the event of an emergency, but you’ll be way less stressed and more relieved that you could swing an emergency when one pops up.

Ways to come up with this money?

Okay, I get it. When you’re already living on a shoestring budget, I get that it can be hard to come up with $1,000 or even $500. Just know that it’s not a sprint–but you should try to build this up as quickly as possible. Use as many or as few of these tips and tricks as you see appropriate for you.

  1. Set a monthly savings goal and pay yourself first.

    Paying yourself before you make any payments on your bills is one of the most important steps you can take–because if your money is in your checking account, you will probably spend it. When I started viewing my savings goals like a video game, I started doing better. This was a really motivating way to build that fund fast for someone like me who loves to gamify everything. Seeing that emergency fund continue to rise is like setting a new high score every pay period–and seeing that number climb, even if it’s only $50 or $100 per month at first is really motivating. Use that budget you created to know what a reasonable payment to yourself is, and if you like to compete with yourself–try to save a little more each time until you reach your desired goal. As a “bonus” level: at the end of the month if you have any remaining money, transfer that balance to your E-fund.
  2. Pay only minimums on your debts until you’ve established the fund.

    Although this may cost you a little more in interest in the long-run, your emergency fund exists so you won’t have to take on new debt. Once you’ve built up your $1000 fund, then go back to paying more than the minimum payments on your debts and get those debts gone as soon as possible.
  3. Decrease your spending.

    Remember that budget you created? You may have noticed that you spend a little extra money on clothes, brunches, or even your grocery bill from month to month. We don’t always buy clothes every month, but we do buy groceries. Groceries are a necessary expense, and by reducing your grocery bill while still getting the same quality products you already buy (store brands are a great easy way to save money), you can quickly build your emergency fund. I practice a few meatless days each week and opt for other proteins like beans, legumes, or lentils. That lifestyle change has drastically helped me decrease my spending in this area.
  4. Increase your income.

    This one is a little more difficult than decreasing spending, only because it requires working overtime (if your job allows it) or getting a second (or even a third) job. In the land of side-gigs in the gig-economy, getting a side hustle can be easy. Just be careful your side job isn’t costing you money. Wear and tear on your vehicle, extra gas required to drive people around or deliver groceries, and your well-being are all important things to consider. I personally work a side hustle as an online adjunct professor for library-related courses (1-3 sections per year as needed) to help boost my savings goals.
  5. Sell things in your home that you aren’t using.

    This is a little more on the drastic side, but all those things you aren’t using are doing is taking up space in your home. Your personal griller in your pantry that you haven’t used in three years can be someone else’s weekly appliance. You may have paid $40 for it three years ago, so expect to sell it for about 1/3 to 1/4 of the price (or best offer). Not only will you reduce your home of clutter, but you’ll also make a quick buck or two in the process. You can sell items on your social media, via FB marketplace, Craigslist, or even a good old fashioned yard sale.
  6. Getting a raise? Save it, don’t spend it.

    Not everyone is fortunate enough to receive a raise each year. If you do, save the difference. If you’re already used to living on last year’s salary, put that extra income into your savings. You’ll be surprised at how quickly that e-fund will grow.
  7. Use your cash windfalls to establish your emergency fund.

    Cash windfalls are when you receive a lump sum of money that’s different from your regular paycheck. We’re not all racking in random money that we aren’t working for. However, most people do receive a giant lump sum of money around tax time. If you’re someone who’s overpaying on your taxes throughout the year, you likely receive a sizeable check after you or your accountant file your taxes. Use this money to complete your emergency fund.

What are some strategies you’ve used to save money fast? It doesn’t have to be for your emergency fund–but what are some strategies you’ve used when you’ve needed to pay for a large unexpected expense? Share them in the comments!

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