Emergencies tend to happen when we least expect them. After all, isn’t that part of what makes something an emergency? However, only 40% of Americans can cover an unexpected $1000 expense with money they have saved. Given this, you would think that having even a small emergency fund would be a must-have. Most people know they should have something in savings, but they might not truly realize what it is and the importance of having one.
What’s An Emergency Fund?
An emergency fund is money that is set aside in a savings account to cover unexpected expenses. Unexpected expenses could include things like:
- major unexpected car repairs
- an ER visit
- emergency dental work
- appliance repair or replacement
- job loss
An emergency fund is not to be confused with a sinking fund, which is money that you set aside for expenses that you know are coming up, for example, minor car repairs. You don’t want to get in the habit of pulling money from your emergency fund for expenses that you should be saving up for anyways. Why? Because when an emergency occurs you run the risk of not having enough money to cover the emergency.
There are two different types of emergency funds that we have utilized:
- Mini Emergency Fund
- 6+ Months Emergency Fund
Mini Emergency Fund
We had a mini emergency fund when we were getting out of debt. The point of the mini emergency fund is so you don’t risk accruing more debt by using a credit card or taking out a loan when something unexpected happens.
How much should a mini emergency fund be? At least $1000. We started with $1000, but it didn’t seem like enough, and we didn’t want to have to pause getting out of debt to build up our emergency fund again if we had to use it. So we upped it to between $1500 and $2000. Another option if you do prefer to only have $1000 while getting out of debt is to cash flow any emergencies that come up so that you don’t have to touch your emergency fund and replace it.
6+ Months Emergency Fund
The point of this emergency fund is to save 3 to 6+ months worth of expenses. Why? Just in case something happens like job loss or an extended absence from work that may result in limited or no income.
After we paid off all our debt except for our house, we started to work on saving up our 3 to 6+ months emergency fund. At first, we were fine with saving only 3 months of expenses because the process seemed to be taking forever. However, once we reached that goal we figured we might as well save up for 6 months of expenses. And plus, 3 months worth of expenses didn’t seem like enough if one of us were to lose our job.
We had that amount until recently when after having our second child I (Kim) felt like we should have more money saved. You know… just in case. I wanted to have a year’s worth of expenses saved up, but that task seemed daunting at the time to Omar and even me. So my compromise was to take the money we saved for our master bathroom remodel and transfer it to our emergency fund. This put us at having 9 months worth of expenses saved up… And having to start all over with saving for the bathroom. #AdultingWin I suppose?
What Expenses To Include For The 6 Months Emergency Fund?
Everyone’s expenses may differ some, especially depending on what expenses you choose to include. Here’s what we included in ours to give you an idea…
- taxes / insurance
- alarm system
- electric / gas / water (estimated $100 for each although our water bill is only $20-$30 per month and the electric and gas bills are opposite of each other depending on the season)
- cell phone
- gas for both cars
- car insurance
We then took the total and multiplied it by 6 to get the amount that should be in our 6 months emergency fund.
Where Should An Emergency Fund Be Kept?
Your emergency fund should be kept in a savings account. You should have easy access to the account, but not so easy that you might be tempted to use it for something that’s not an emergency.
We kept our mini emergency fund in our joint savings account.
For a while, we had our 6 months emergency fund in our joint checking account too. But once we decided to refinance to a 15-year mortgage, we chose to go with our credit union as our lender. I wanted to move the money to a different bank because it felt like the old saying of “too many eggs in one basket.” So we moved the money to a money market account at another credit union. This way we would still have easy access to it if the need arose.
However, after some time Omar realized that the interest we were gaining on our emergency fund wasn’t much at all, and he wanted more. The point isn’t to gain interest per se, but if the money is going to be sitting there, then why not? After some research, we decided to move it to Ally, which is an online bank with interest checking and savings accounts. Currently, their rate is 2.20%. It does take a couple of days for the money to transfer. So a good thing to do is keep $2000 or so in your regular savings account just in case you need the money ASAP.
How To Build Up An Emergency Fund
Start with your budget. If you’re not doing a budget, then you need to start. Doing a budget can help you figure out how much money you can save for your mini emergency fund or your 6+ months emergency fund. If you need help getting started with doing a budget, click here.
Set your goal. Decide how much money you’re going to aim to save per month (or per paycheck). No matter how big or small the amount, start somewhere. Saving for your emergency fund is an emergency.
Re-evaluate as needed. Once you start saving, it may go slower or quicker than you expected. After a couple of weeks or months, re-evaluate your budget and your goal to see if there’s any room for improvement. Is there anything you can eliminate from your budget to make the process go faster? Is there any extra money coming in that can be used to make this happen even faster?
Our Experience With Having An Emergency Fund
“Small Scale”: Cars Break
When Kim and I were dating in college she had a late 90’s Honda Accord. It was a great car. It got her to work and to school reliably… for the most part. Just like every other car it required maintenance. I remember several times when Kim would take her car to the mechanic for an oil change and they would tell her she needs something else. Or that time her check engine light came on and she had to get her O2 sensors replaced. Sometimes when one of these events took place she would call me crying asking me how she was going to pay for this. Like most college students she made just enough to squeak by and have a little bit of fun.
I had a decent job working at UPS part-time while going to school full-time and made decent money for a college student that lived at home. I gave her a hand with these costs when I could. These repairs maybe cost $450 dollars at most. Thinking back it amazes me that those events, emotionally, were emergencies! Now we save for car repairs as we know they will be approaching.
“Big Scale”: A HVAC Can Break Too
Holy Crap…our HVAC went out and it was 35 degrees outside. Actually, it was about 35 degrees inside too. This happened towards the end of 2016 just as we were getting ready for our kitchen remodel. Seven years ago this would have been an EMERGENCY. I mean, it still was, but just follow me for a minute. The usual question would be going through my mind, “How are we going to pay for this?” However, this wasn’t a grade A emergency. It was downgraded to an inconvenience. A huge inconvenience, but an inconvenience nonetheless. Why? Because we had our emergency fund.
However, we were faced with a tough decision. Do we go ahead with our kitchen remodel that we’ve been waiting for and saving for and use our emergency fund to cover the HVAC??? Or do we hold off on the kitchen remodel and use the money for our new HVAC system??? Talk about when “adulting” can truly suck.
What did we choose to do? In this case, we chose to not touch our emergency fund and use the money for the kitchen remodel instead. Why? Because we didn’t want to have to pay ourselves back. The bright side of this situation is that we were able to get the HVAC and still get the countertops for the kitchen a month later. Yep, it was a little annoying that we couldn’t get our appliances right away but with our ability to budget and Kim working extra shifts, we were able to replace that $4500 in a few months. I can’t tell you how awesome it is to be in this position and not shed a tear or break a sweat back then (actually it was too cold to sweat lol).
More Money, Smaller Problems?
The thing that we realized is that when you have money, particularly an emergency fund, emergencies don’t cause as much panic. You can look at the situation and make a sound decision. The worst time to make a decision is when you are under intense pressure because it’s more difficult to weigh the cons. This is how people get scammed depending on the situation.
When an emergency comes and you know you can handle it you can focus on doing just that – handling it. Being a grown-up is tough. Sometimes emergencies have the ability to rock you to the core. An example that I’ve discussed before is that a month before Kim was due with our first son, I became very sick. For a while, the doctors didn’t know what was wrong with me and eventually, they thought it was cancer (Lymphoma).
There we were with a newborn, hospital bills for Kim and the baby, and ER and doctors’ bills for me. Talk about being scared and sad beyond belief. You can read more about the story here if you like. Ultimately, it ended up not being Lymphoma although I was still sick for a while.
The one thing we weren’t too worried about at the time was money because we had our 6 months emergency fund and we had life insurance policies for both of us. This allowed us to have one less thing to worry about.
Given a similar situation or medical emergency, having an emergency fund and your finances in order can help allow you to fully focus on your treatment and getting better instead of worrying about your bills AND trying to get better.
Emergencies are going to happen. We all know this. Having an emergency fund can make dealing with those emergencies so much easier. It allows you to make clear-headed decisions instead of panicking and doing something that will hurt you in the long run.