Saving up for emergency expenses by building up a solid emergency fund should be included in everyone’s financial plan. Unexpected events and expenses are going to pop up, that’s life.
It’s important to be prepared for a rainy day whether it is a job loss, medical expenses, vehicles repairs or any situation when you need cash fast by setting aside funds in a separate bank account designated to handle emergency situations. There are many benefits associated with having a nice sized emergency fund, including the fact that it prevents you from having to use credit cards to pay for things and get yourself into deeper credit card debt.
But I’m not going to talk endlessly about the benefits of having an emergency fund in place today. If you’ve read plenty of personal finance blogs, you’ve probably already read about their purpose and how great they are. I’m sure you’re more interested in figuring out how to grow your own emergency fund, store it in a safe place, and make it last when you need it to.
How Much Should You Save?
Determining how much to set aside for your emergency fund is always tricky. While everyone’s situation and needs are different, financial experts have made some interesting recommendations as to how much money you should set aside in an emergency fund. Dave Ramsey and David Bach recommend having between 3 to 6 months of expenses set aside while Suze Orman recommends having at least 8 months of expenses saved.
How much you choose to save depends heavily on your financial situation. For example, when you are in the process of paying off debt, Dave Ramsey recommends saving up at least $1000, then focusing heavily on paying down the debt as opposed to saving up several months of expenses.
When it comes to building an emergency fund there are plenty of ways to do it and you don’t have to agree with financial experts 100%. While I’m in the process of paying off my debt I don’t think $1000 is enough to make me feel comfortable should any emergencies occur this year.
Car repairs and medical expenses can easily blow through $1000 in just one day. On the other hand, I feel pretty stable and secure at my job and since I rent I don’t have a ton of financial liability. So I think having 8 months of expenses sounds a little extreme when I could be investing that extra money in the market or using it to add to my debt payments.
When you’re deciding how much you need to have in your emergency fund, consider what amount you’d feel comfortable with along with these factors:
- Whether you’re self- employed or work a day job
- If you own a vehicle
- If you own or rent (homeowners are going to need more or a financial cushion)
- How stable your income is. Does it fluctuate or remain consistent?
- Whether or not you have kids or pets (they can have emergencies too)
Where Should You Keep It?
You want to keep your emergency fund separate from your regular checking account to clearly distinguish the difference between the two. You also want to make your emergency fund easy to access in the event that you need the money quickly.
While it’s not the best idea to stash thousands of dollars under your bedroom mattress, keeping your money in a high interest yield savings account is the best option. I personally use Capital One 360 (formerly ING Direct) to house my emergency fund because my money is just sitting in the account it can earn interest over time.
The only issue I had with Capital One 360 is that when I schedule a transfer to my regular checking account the money takes a few business days to transfer over. I understand that when true emergencies occur, there won’t be time to wait for a few days.
Luckily I found out Capital One 360 also offers online checking accounts (that also earn interest) with debit cards that can be used at various ATMs without paying a fee to withdraw money. When you have both savings accounts with Capital One 360 you can transfer money easily and instantly. They also offer multiple savings accounts you can create targeted accounts to divide up your savings.
Defining the ‘Emergency’ in Emergency Fund
When you’ve saved up several months of expenses it’s important not to get tempted to spend the money on non-emergency situations. Some emergency situations are preventable and just because you have the money set aside doesn’t mean you should avoid taking preventative action just so you can rely on your emergency fund.
Car repairs and maintenance are good areas where you can take preventative action to avoid dipping into your emergency fund. We all know vehicles depreciate over time but then again we all know that we need to take care of our cars if we want them to last.
Taking your car in for routine oil changes and saving up for brakes and new tires ahead of time are great ways to prevent emergency car repairs from occurring and costing you tons of money.
An emergency fund is very different from a regular savings account and shouldn’t be used for non-emergencies like large purchases or home upgrades. In other words and to be pretty blunt, don’t touch your fund until something pretty bad happens.
The Key to Building a Solid Stash of Cash
In order to ensure that your emergency fund money is only being used on situations that threaten your survival, it’s a good idea to set up a few different funds to cover major different areas of your budget in case it falls apart.
For example, what if you lost your job and got sick shortly after or your car started having engine problems? That 3-6 months of expenses you saved up is not going to last you that long since you have to factor in a job loss and medical expenses.
Let’s say you quit your job in hopes of starting a business. You don’t want a new roof repair for your home to eat into your savings for everyday living expenses. Sometimes categorizing is key.
My favorite categories are:
- General emergencies, home, kids/baby
- Vehicle Emergencies
- Medical Emergencies
Do you have just one emergency fund or a few different ones? How did you determine how much you felt comfortable saving?