I had just gotten home from work when I heard a knock at my door. I opened it to find one of my new neighbors whom I hadn’t met yet. He proceeded to tell me how I had water gushing through my yard and into the street, the cause likely a burst water line. It wasn’t until he mentioned contacting the county to see if they would forgive the cost of water literally going down the drain until I thought about how much all of this might cost. I had only bought my house three months ago. How could I already have a catastrophe on my hands?
Even if you don’t own a home, an emergency fund is crucial to good financial health. Essentially it’s your “get out of jail free” card. Unexpected health, auto and home insurance deductibles, car repair, or unemployment can be much less stressful when you have funds reserved for such an occasion. Just knowing I had savings for rainy days reduced the overall stress of my financial obligations.
In this article we’ll go into detail on the makings of a good emergency fund including:
1. How much is enough?
2. Where do I put my emergency fund?
3. How do I save for an emergency fund?
How Much is Enough?
The general rule of thumb for a good emergency fund is enough to cover 6 months of expenses. Assuming you’ve followed my advice of how to get control of your finances, you should know how much you spend over a 6 month period. If you don’t know how much your expenses are, begin tracking them in the income and expense tracking spreadsheet.
If you’re looking for a swag to get started, start a fund that covers your insurance deductibles. Just having enough to cover these is a great starting point. Depending on your deductibles, it may even be your ending point!
Ultimately I saved a $10,000 emergency fund before I bought my house. I did not want a house to bankrupt me, and I knew debt would stress me out. Creating this emergency fund helped assuage the stress of taking on such a big financial commitment singlehandedly.
Where Do I Put My Emergency Fund?
The whole point of an emergency fund is to have money accessible in the event something unexpected happens and you have expenses you didn’t plan for. However, you don’t want it to be too accessible or you may impulsively spend it on a non-emergency. For this reason (and many others), cash is not the best option. Even cash-king Dave Ramsey does not recommend cash for an emergency fund.
The best account for an emergency fund is a savings or checking account. This account should be separate from any other savings and checking accounts you use on a regular basis. I use an online savings account through Discover bank because there are no fees and a competitive interest rate.
Stocks, retirement accounts, CDs, etc. are not good emergency funds because it’s time-consuming to convert them to cash. In the case of a retirement fund and CD, you’re penalized for withdrawing early. Stick to a savings or checking account.
How Do I Save for an Emergency Fund?
Saving for an emergency fund is just like saving for anything else. You need to make it a priority over other options, especially discretionary (non-essential) spending. Add a line item in your budget to allocate money to your fund. A phrase I like to use is “buy once, cry once.” Get your emergency savings in place and you can forget about it. Put less important priorities above it and you’ll feel the pain.
If you’re really struggling to save, take a look around at everything you own. Sell anything you haven’t used in the last year and contribute the earnings to your savings. While you may look at out of style clothes as meager revenue generators, you’ll be surprised how much they add up. Not to mention you can clear the clutter while you’re at it.
Conclusion
A good emergency fund is essential to cover any unexpected expenses. Putting aside some money for emergencies provides security and tranquility to handle life’s curveballs. The first time an expected blow comes your way, you’ll be financially prepared to handle it with ease.