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Everything You Need to Know About An Emergency Fund

August 31, 2019 Leave a Comment

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Life doesn't wait for you to be ready. Not having money stashed away in an emergency fund is killer for your financial future. Learn how to fix it!
Ivory Mix

Perhaps one of the biggest lessons I learned growing up was that life doesn’t wait until it’s convenient to throw financial curveballs your way. Most people aren’t ready, and don’t have an emergency fund (or even know what one is!) to guard against this.

When I was 18, I sat in my car in college crying because my rent was due. No big deal right? Except that my financial aid money had run out, my parents couldn’t help me, and I wasn’t getting paid for another week. Being young and broke, I only had enough money in my bank account to pay half my rent. Of course I freaked out!

Thankfully, I was able to figure it out and didn’t end up on the street, but that experience has stuck with me. I made a promise to myself that day to do everything I could to not end up in that position again.

How many of you have had a similar situation? It could be any sort of emergency! This is where having an emergency fund matters, and you’ll be glad you have one in place. Whether it’s getting a flat tire, needing to go to the doctor unexpectedly, or losing your job, emergencies can and will happen.

The question is, will you be prepared next time when (not if!) life goes wrong and threatens to wreak havoc on your finances?

What is an Emergency Fund?

An emergency fund is exactly what it sounds like: a fund set aside for whenever an emergency pops up. An emergency can be a lot of different things to different people.

Saving for an emergency fund is usually based on projections about how much you’d need if you lost your job. However, it’s helpful to have money set aside for anything that life throws at you that is unexpected, unplanned, and could totally derail your monthly income.

Important: you shouldn’t treat your emergency fund as disposable income. This isn’t money to spend next time you want a new phone or there’s a sale. Those aren’t emergencies.

How Much Money to Put Into Your Emergency Fund

Determining the amount of money that you should save up in your emergency fund is a personal decision. You should consider your salary, job security, risk tolerance, safety net access, and many other factors.

The general rule of thumb is to keep 3 to 6 months of living expenses in your emergency fund. Note that this is based on how much money you actually need in order to pay all your bills and other necessities.

This does not include the amount you normally save every month or other discretionary purchases. This number may or may not be different than the amount of money you bring in every month from work.

Keeping this much money stashed away obviously helps immensely if you ever lose your job. Also, this provides a good buffer for you if you ever have unexpected expenses that would cause you to go into debt otherwise.

While everyone’s different, my personal strategy was to save $1,000, then save for a 3 month emergency fund, then once I reached that goal, I set another goal of reaching a 6 month emergency fund. I’m pretty cautious and risk averse, so I’m currently working on getting my emergency fund to 12 months.

But again, I’m very risk averse and love the peace of mind that having cash on hand (well, in a high-yield savings account, see below!) brings me.

Where to Keep It

Because your emergency fund is for situations when you might need money quickly, it’s good practice to keep it in an account that’s easily accessible. Don’t keep it someplace too easily accessible though. if it’s in your checking account, for example, you may be tempted to spend it.

What I’ve found that works best for me is to keep this money in a high-yield online savings account. Note that is a completely separate account from my checking account, with a totally different bank.

Why an online savings account? A high-yield account allows your money to work for you passively. A lot of accounts will pay 2% or more interest to simply hold your money.

You literally don’t have to do anything with your money and it’ll grow on its own. Why would you turn down free money? It’s a no-brainer for me!

Some of the best high-yield savings account currently out there are Marcus and Ally. I personally use Marcus and earn a 2% rate of return on my money.

These accounts are easy to fund and easy to access when you need them, and pay a whole lot more interest than most other banks out there.

Using & Replenish Your Emergency Fund

I hope you never have to use your emergency fund, but you shouldn’t hesitate to use it if you ever need it. If you wreck your car and need to pay your insurance deductible, you should use your emergency fund for that.

Even if you have to completely deplete it. While you can (and should, imo) use your credit cards to pay for these emergency bills that may pop up, always pay them back in full with the money you’re set aside for emergencies. Never go into debt because you’re scared to touch your emergency fund.

Of course, if you use the fund, now it’s time to replenish it! You should work on replenishing it as soon as you can. Again, you’ll never know when another emergency will hit. It happens.

I treat any money I take out of my emergency fund as a loan to myself. Looking at your budget, you can decide how much you’re able to “pay back” to your emergency fund every month. You can do this until you’re able to reach the pre-emergency level.

How has your emergency fund helped you in difficult circumstances? Let me know in the comments!

Life doesn't wait for you to be ready. Not having money stashed away in an emergency fund is killer for your financial future. Learn how to fix it!

Filed Under: Money Tagged With: emergency fund, money, saving

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Hi! I'm Ale. I'm a 20-something Latina who loves to save money, travel, and cook easy meals. I love to help young women build good financial habits, travel on a budget, and make quick and easy meals. I hope you'll stay a while!

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