Why Everyone Needs an Emergency Fund
When life throws unexpected curveballs, having an emergency fund can be a financial lifesaver. It's your safety net for those times when you face sudden expenses or a disruption in income. So let's explore why an emergency fund is essential, how much you should save, and where to keep your money to ensure it's there when you need it.
What Is an Emergency Fund?
An emergency fund is a reserve of cash set aside specifically for unplanned expenses or financial emergencies. It's there to help you avoid going into debt or experiencing severe financial stress when something unexpected happens.
Think of it as your personal financial insurance, giving you peace of mind and a sense of security.
Why You Need an Emergency Fund:
An emergency fund can cover a wide range of unexpected costs, such as:
Job Loss: If you lose your job, having an emergency fund can cover your living expenses while you look for new employment.
Medical Emergencies: It can help pay for unforeseen medical bills, whether it's a hospital visit or a sudden dental emergency.
Car or Home Repairs: Unexpected repairs can be costly, and an emergency fund ensures you don't have to rely on credit cards or loans to cover them.
Family Emergencies: If a loved one needs immediate assistance, an emergency fund can cover travel or other expenses.
Without an emergency fund, you might find yourself in a difficult financial situation, relying on high-interest credit cards or loans to cover these costs.
How Much to Save
The ideal amount for an emergency fund depends on your personal circumstances, but here are some general guidelines:
Start Small: If you're new to saving, aim for $500 to $1,000. This is a great starting point for smaller emergencies.
3 to 6 Months of Expenses: As you build your fund, work towards saving enough to cover 3 to 6 months of living expenses. This includes rent/mortgage, utilities, food, transportation, and other essential costs. If your income is stable, 3 months may be sufficient. If it's uncertain, or you have dependents, aim for 6 months.
Reassess as Needed: Your emergency fund should grow with you. Review your fund periodically, especially after major life changes, to ensure it's sufficient.
My Journey:
When I first learned what an Emergency Fund (EF) was, I was in the middle of a debt pay-off journey with my student loans. I had finally gotten into some good money habits and was incredibly motivated to pay my debt off quickly, so I decided to start with a baby Emergency Fund of $1,500. I already had a bit of money saved, and I lowered my next 2 debt payments to hit my EF goal. Once I paid off my debt, I then built my EF to $7,000 (3 months of expenses), before I started to focus on building up my investments.
Where to Keep Your Emergency Fund
An emergency fund needs to be accessible but also separate from your regular spending accounts to avoid accidental use. Here are some tips:
High-Interest Savings Account (HISA): This is a great place to keep your emergency fund. It earns interest while allowing you to access the money quickly if needed. (It’s also sometimes called a High-Yield Savings Account). To learn more about HISAs check out our recent blog on how to choose the right account for you.
Separate Account: Keep your emergency fund in a different account from your checking or regular savings accounts. This makes it less tempting to dip into it for non-emergencies. Many banks will let you add extra savings accounts for free, and you can often rename them so you don’t confuse them (e.g., call this one “My Emergency Fund”).
Avoid Risky Investments: The goal is to keep your emergency fund safe, so avoid investing it in stocks or other assets that could lose value. Ideally you should be able to access and withdraw money from your Emergency Fund immediately, with no fees.
Building Your Emergency Fund
To start building your emergency fund, follow these steps:
Set a Goal: Determine your initial goal and work towards it. Remember, even small contributions add up over time.
Automate Savings: Set up automatic transfers from your checking account to your emergency fund. This helps create a consistent saving habit.
Cut Unnecessary Expenses: Identify discretionary spending you can reduce or eliminate to free up money for your emergency fund.
Use Windfalls Wisely: Bonuses, tax refunds, or other unexpected income can give your emergency fund a boost.
With a well-established emergency fund, you'll be better equipped to handle whatever life throws at you, giving you more control and confidence in your financial future.
KEY TAKEAWAYS:
An emergency fund provides a financial safety net for unexpected events, reducing stress and preventing debt.
Begin with a manageable goal, then work towards 3 to 6 months of living expenses.
Keep your emergency fund in a high-yield savings account and/ or a separate account for safety and accessibility.
About The Authors
Amanda and Siobhan found a shared passion for personal finance shortly after completing their MBAs in 2018. Amanda excelled as a Director of Product in the tech industry, while Siobhan established herself as a leader in e-commerce before transitioning to academia as a Professor.
In 2020, they joined forces to found Hiver Academy, a platform born from their own experiences and triumphs in conquering student loans and building wealth. Realizing that financial success is within reach once the complexities are simplified, their mission now revolves around empowering individuals to achieve financial freedom.
With a wealth of knowledge and a commitment to demystifying money and investing, Amanda and Siobhan are dedicated to helping others navigate the path to success.
