What Is An Emergency Fund And Why You Need One

Just starting to turn your financial life around?

If so, you may not have heard about an emergency fund or why you need one. I don’t blame you.

You wouldn’t run across emergency funds in everyday conversations, but they are essential to financial success.

What Is An Emergency Fund?

An emergency fund is basically a stash of cash that can bail you out in case of an emergency.

This money should be kept in a liquid (accessible) form should you need it in a hurry.

I personally keep my emergency fund at an online savings account.

My money is still accessible enough that I can get it in a couple days, but I’m not splurging on a non-emergencies because the money takes a couple days to access.

To start your own emergency fund, simply open a new savings account at your bank. Keep the money separate from your other savings and add to it whenever you can until it is fully stocked.

How Much Money Should You Keep In Your Emergency Fund?

There is no set standard amount you should have in your an emergency fund.

Financial guru Dave Ramsey suggests just a $1,000 emergency fund until your debts are paid off while another financial guru, Suze Orman, suggests an 8 month emergency fund.

Trent from The Simple Dollar suggests 2 months of expenses per dependent. As you can see, different people set different requirements for their emergency funds.

You should have an emergency fund that is a comfortable amount for you just in case something horrible happens.

Your emergency fund will need to get you through rough financial times. Luckily, you won’t have to worry about going into debt or incurring a massive credit card bill if your fund is the proper size.

If you have a very specific job that doesn’t have a lot of demand, you might need to have a larger emergency fund, such as 8 months of expenses, because it would be harder to find a new job.

However, if you have a job that is in high demand then you might be able to get away with a smaller emergency fund such as 3 months of expenses.

What Is Considered An Emergency

The only reason to use money out of your emergency fund is a true emergency such as job loss, unexpected medical bills, an emergency breakdown of expensive equipment, such as a car or air conditioner, and other non-expected things.

Unfortunately, many people make up excuses to drain their emergency funds for other non-emergency purposes.

What Isn’t An Emergency

Draining your emergency fund for a non-emergency can be a huge mistake.

For instance, if you decided to splurge with the best intentions of replacing the money and then you lose your job you’re in deep trouble with no financial back up plan.

No, buying a pool for your house is not an emergency. Neither are a bunch of other common excuses people use to take money out of their emergency funds.

Your yearly insurance payments, Christmas gifts, car registrations, property taxes and any other ordinary but non-emergency bill you might think would be a good excuse to drain your emergency fund are not emergencies.

Why Having An Emergency Fund Is Essential

An emergency fund is essential because it can save you from going into debt when something bad happens.

If you’re following the most popular budget in America, living paycheck to paycheck, the smallest little hiccup can be the difference between making it to the next paycheck and going into debt.

When you have your stash of cash, or emergency fund, you can survive the problem without going into debt and incurring interest charges that you can’t afford.

Instead, you can earn interest, even if it is a small amount, and set yourself up to take the next financial steps in your life.

Ideas To Kickstart Your Emergency Fund

If you haven’t yet started an emergency fund, here are a few ways you can get started today.

• Have a garage sale, sell unwanted items and save the cash.
• Work one extra shift per month at work and save the extra income.
• Start a side hustle and save your hard earned earnings.
• Save the cash and change anytime you break a large bill.
• Put your tax refund straight in the bank.
• Get a portion of your direct deposit from work allocated to your emergency fund.

You’ll always be fearing the next unknown emergency or visit from your friend Uncle Murphy unless you have an emergency fund. Don’t tempt fate. Start an emergency fund today and don’t use it for non-emergencies.

Do you have an emergency fund? If so, how did you determine how much to keep in it? Are you comfortable with your current emergency fund or do you wish it was bigger?

Lance Cothern, CPA

Lance Cothern, CPA holds a CPA license in Indiana. He’s a personal finance, debt and credit expert that writes professionally for top-tier publications including U.S. News & World Report, Forbes, Investopedia, Credit Karma, Business Insider and more.

Additionally, his expertise has been featured on Yahoo, MSN, USA Today, Reader’s Digest, The Huffington Post, Fast Company, Kiplinger, Reuters, CNBC and more.

Lance is the founder of Money Manifesto. He started writing about money and helping people solve their financial problems in 2012. You can read more about him and find links to his other work and media mentions here.