Emergency Fund: Everything You Need to Know About It

As I shared with you on Friday, I recently got a new job. While it is definitely a good thing that I accepted this new position, it did come with its own challenges. Getting a new job is usually a sign of financial relief, but my situation was quite different. As many of you know, I currently commute to work via train (even through the coldest of weather). Since this new position is not on the train line, I was forced to buy a new car. Well, used car, but new to us.

While this new job came with a slight increase in pay, in no way did it come with a signing bonus. This meant a several-thousand-dollar purchase on top of my regular expenses. I don’t know about you, but my wife and I don’t make this much more than our regular expenses. This meant I had to turn to our decently-sized emergency fund.

Emergency funds exist for a reason and this is it. Coming up with cash in a short period of time to cover unexpected costs. Granted, I knew this expense MIGHT come when I applied for the position. I knew weeks in advance that if I got the job, I would have to buy a used car. While I knew in advance, weeks ahead of time would not have been enough to cover even the cheapest of reliable cars. In other words, my emergency fund was necessary. (Childhood translation: Emergency Fund to the Rescue!)

emergency fund

You never know when emergencies might surprise you

How to Much to Save for an Emergency Fund

Many people do not have an emergency fund, and I’m not surprised. As I mentioned, many families do not make much more than their monthly expenses. On top of that, it’s hard to motivate oneself to use what little you have left over to create an emergency fund. In other words, storing money away for a rainy day is not a top priority. Life gets in the way.

Despite how hard it may be to motivate yourself, you should make an effort to create one. You don’t have to start out with a lot, but you should put something that will help you through a difficult time. Some people say to start with $1,000, but I am the type who wants something more substantial. I would prefer to have 6 months of expenses. This is often the rule of thumb. Some say 3 months, some say 12. While I may side with 6 months, ultimately it’s about having enough to make you feel comfortable.

Where to Keep Your Emergency Fund

Perhaps the topic that is even more debated when it comes to emergency funds is where to keep it. Many people place their emergency fund in a savings account for the sake of liquidity, or easy access to it. Others put their money at higher risk by investing it. I, on the other hand, prefer to get a higher interest than a standard savings account without putting my money at risk. It’s intended to let me sleep easily at night. I don’t need the highest interest on this small part of my net worth.

A great alternative is high interest CD’s. While it’s possible to find any random CD without even looking for the highest CD rates, you will lose out on some money. As it turns out, Discover publishes a great resource of the highest CD rates┬áthat is worth looking at if you are thinking about a CD to keep your emergency fund.

If you do decide to put your money in a CD instead of a high interest savings account, it’s important to consider staggering your money. In other words, it may be worth your time to put your 1/2 of your money in one CD and the other half in another one six months later. This lowers the probability of having to pay a penalty for withdrawing your money early. It is unlikely that you will need most of your emergency fund, so this may be a great alternative.

When to Use Your Emergency Fund

Last, but certainly not least, is the aspect of what qualifies for an emergency. Many people use “emergency” very loosely and will spend their emergency fund on wants or desires instead of actual emergencies. While many would argue that my car purchase is not necessarily an emergency (we have one car that works and we COULD get by with the one). This would, however, mean that we’d drive a lot more miles on our current car and spend an extra hour each day in the car. When you combine this reason with the fact that we have a large enough emergency fund to still cover 5-6 months of expenses, I feel like it’s okay to use it.

If you are at a point where you are considering using your emergency fund, ask yourself if you have exhausted all other efforts. Have you tried to minimize your other expenses for recent/upcoming months? Have you thought about finding extra income for this month? If you have tried everything else and you still need some cash, it’s probably an appropriate time to use it.

While emergency funds may be difficult to build up while you are facing many of life’s expenses, they can do wonders to take away the stress of personal finances. The unexpected bills are best conquered when you prepare for them ahead of time. The best part that I have learned recently is that when you do commit yourself to save up money for a rainy day, you are less likely to spend that money because you know in the back of your mind that you worked hard to build it up. It therefore not only provides a financial cushion, but teaches you to spend less in the process of creating it.

Readers, have you created an emergency fund? Where do you keep it and have you ever had to use it?

3 Responses to Emergency Fund: Everything You Need to Know About It

  1. I do have an emergency fund that currently sits in my ING savings account and I luckily have never had to touch it!

  2. Congrats on the new job! What car did you get and did you pay for it with cash?

  3. Deacon says:

    We have a six month emergency fund, however, we have had to dip into it a couple times for medical expenses and car repairs. It wont take long to fill it back up though and we are glad that we had it.

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