Emergency Fund: What It Is & Why You Need One

Updated: September 19, 2019

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Why is having an emergency fund important?

You’ve probably heard this a thousand times. Family and friends probably told you to have some sort of fund that will answer for any unscheduled or unexpected expense.

The reality is that you will encounter at least one unforeseen or unanticipated expenditure in the future.

If you’re lucky, the amount involved won’t hurt your budget.

But what if that unexpected expense bears a heavy toll on your finances?

What do you do?

It’s likely you’ll borrow money from friends and family. Or you’ll take out an interest-bearing loan, which will take you months or years to pay off.

Or worse, you’ll get hit by not just one but multiple unfortunate incidents that require disbursements in the thousands of dollars.

It could be a medical emergency or an unscheduled home or car repair. These are just some of the things that can hit hard on your finances as well as cause massive stress and anxiety on your part.

Here’s what you need to know about maintaining an emergency fund.

Most people think the backbone of a strong personal financial plan is the savings account.

But actually, it’s not.

It’s really the emergency fund.

Unexpected emergencies can pop up, and they can cause a huge dent in your budget. As a result, managing your finances can get stressful.

One way to mitigate the effects of an unanticipated emergency is to set up a buffer account.

This is where the emergency fund comes into play.

With an emergency savings fund in place, you are better prepared to face these challenges. You don’t have to turn to borrowing, which can only create unnecessary stress.

While it won’t solve all your money woes, an emergency fund is a great start to achieve your financial goals.

What is an emergency fund?

An emergency savings fund is an account dedicated for a sole purpose, which is to answer for any emergency.

The money set aside in this fund will not be for a planned purchase; whether it’s for a new house, a new car, or your child’s college education.

An emergency fund doesn’t have to have a large amount.

You can start small, building it over time. The goal is to reach a certain amount that is sufficient to meet your needs should an emergency happen.

Personally, I prefer to maintain an amount equivalent to six to months of living expenses, but if that is a huge stretch for you start with something more attainable like $1,000.

Having an emergency savings fund can give you peace of mind, knowing you have enough money should something awful happen. Whether it’s losing a job or dealing with a medical condition.

Because you have money on standby, you can take comfort in knowing you’re going to survive financially until you can fully recover.

How do I start my emergency fund?

Start small, putting in as much extra in come in at a time to build your emergency fund.

With smaller goals, it’s easier to reach, and you won’t feel too compelled. There’s less stress on your part as you create a fully stocked fund.

Plus, setting smaller goals will give you a sense of accomplishment.

Once you have the emergency savings fund in place, you are better prepared at handling life’s emergencies without going into debt. This allows you to pursue bigger financial goals.

You can gain momentum in your savings and investing objectives since you won’t be distracted by any unexpected setback.

Why set up an emergency fund?

Having an emergency savings fund is great, but is it for you?

You’re probably thinking you don’t need to have one right now.

Maybe because you have a secure and stable job that pays well. And you have the skills that let you find another job quickly.

Or you have a credit card that you can use in case of an emergency.

But here’s the unfortunate reality.

Everyone at some point will face a financial emergency. And the circumstances may not be as favorable as you want them to be every time.

With an emergency fund, you get a sense of financial security, knowing you can face anything that life throws at you.

Here are two of the most common emergencies to convince you of the need to have an emergency fund.

1. Medical Emergency

Do you have medical insurance?

It’s good to have coverage to answer any healthcare cost that you will incur as a result of a medical emergency.

Unfortunately, your insurance policy will not cover everything.

What if you have to miss a couple of days due to an illness or injury?

What if you haven’t met your yearly deductible yet?

2. Loss of Income

What if you lost your job?

When you’re already struggling financially, the worse thing that could happen is being fired.

Suddenly, your world crumbles, and you end up desperate to get another steady source of money. Otherwise, who’s going to pay for the bills?

Loss of income is a real situation that happens to many, and it could happen to you.

So what do you do when it does?

Financial emergencies are going to happen.

It’s a reality.

At some point, you will encounter unexpected or unanticipated major expenses that could potentially drain your bank account.

Whether it’s losing a job or experiencing unanticipated expenses. These are just some of the instances where an emergency fund can come in handy.

The key to preserving your financial future starts now.

Here’s the good thing. You have a lot of time to prepare for any financial emergency.

And the time to start is now.

Can you imagine having an emergency fund to buffer for any eventuality?

With a dedicated account in place, you have access to needed funds to cover the necessary expenses.

That way, when a financial emergency happens, you can mitigate its effects.

Want to start building your emergency fund?

Here are my suggestions.

First off, let’s tackle how much you should save.

The answer greatly depends on your financial needs.

If your expenses are high, then you’ll need more in your emergency savings fund.

A good long term goal to aim for is six-months of living expenses.

That way, if your source of income is cut off, you’ll have enough to cover the living expenses for the corresponding number of months.

You’ll also have enough money while you work on finding another job.

Should you set aside thousands and thousands of dollars in your emergency fund?

Not necessarily.

You don’t need to put a lot of money into your buffer fund.

But the amount should be enough to meet your needs if an unfortunate event happens.

If you’re renting a home or paying off a loan, then you’ll want to include the corresponding amounts in your emergency fund.

For families that rely on freelance work, you should aim for a much higher amount.

The more dependents you have, the bigger the fund you should maintain.

As you stow away more funds for the rainy day, you’ll be better prepared when a financial emergency happens.

When you reach your emergency cushion equal to six to eight months of income, push for 12 months worth.

It may seem like a faraway target, but don’t let that fact discourage.

Consistently put money into your dedicated fund, and build it over time.

Start saving as early as now.

Save as little as $500 a month, and slowly create your emergency fund.

It’s a good idea to start with a small amount; one that’s easy on your budget.

That way, it’s more doable and you won’t get stressed out as you manage your money every month. Otherwise, you’ll get tired and might decide to completely drop your plan to create an emergency fund.

If you have extra money to spare, put it in the emergency savings fund. Every little penny counts.

Where to put your emergency fund

Because you are preparing for a financial emergency, quick access to this exclusive fund is crucial.

However, this fund should be separate from your bank account.

When it becomes too convenient to access, you might be tempted to dip your hands into it.

A good place to put your emergency money is in a high-yield savings account.

What’s great about this type of savings account is that it’s federally insured up to $250,000. Plus, your money will earn interest income.

And when you need quick access to the money, you can just withdraw or transfer the funds.

You might also want to consider putting your emergency fund in money market accounts.

Save first then spend the rest.

Each time you get paid, make sure to put money into your cushion fund first. Then you’re free to do as you please with the rest of the amount.

The idea is to treat this savings fund as if you’re obligated to pay money to someone.

It’s just like paying the bills. You surrender a certain amount to pay off your obligations.

So allocate a portion of your income to put away in your emergency fund.

This method can help you get into the habit of saving.

Keep the change.

Do you have ones and fives in your wallet?

Don’t take them for granted.

After breaking a $20, instead of leaving the spare change anywhere, drop them in a jar.

When the jar fills up, put the saved money in your emergency fund.

It helps to cut your expenses.

The less spending you do each month, the more money you can stash into your fund.

See which monthly expenses you can trim.

You can start by avoiding small purchases like buying takeout coffee.

Or cooking more meals at home instead of takeouts.

If you are a two income earning family try to live on one income.

Have you considered getting a side job?

If you want to earn extra, you might want to get a side hustle. It can help you reach your financial goals while you work at home.

You’re earning, and you’re still able to take care of your household.

The best thing about these online jobs is that they let you work around your schedule.

Take blogging for instance. You can work on days and hours that fit your schedule.

If you enjoy being on social media most of the time, you can take a job as a social media manager. Depending on the number of clients you have, you can earn between $1,000 and $10,000 a month.

Check out my post for more on these online jobs for moms.

Adjust contributions after a few months.

Check in every couple of months and see how much you’ve set aside.

You may adjust the amount of money to save if you need more in your emergency fund.

Your emergency fund is only for financial emergencies.

This cushion fund acts as a buffer when those “just in case” situations actually happen.

Just in case you have a medical emergency
Just in case your car breaks down.
Just in case you need to pay something for your child’s education
Just in case your pet needs vet care

There are a lot of these “just in case” emergency scenarios.

So what doesn’t constitute an emergency?

If the old TV no longer works, you can’t justify buying a new TV as an emergency expense.

Same goes when finding a great deal on a vacation.

Or when one of your closest friends makes a last-minute request for you to fly to her destination wedding.

Some people stretch the concept of financial emergency to include nonessential expenses.

So it’s important to draw the line between a true financial emergency and everything else.

Saving for the unexpected.

Do you have an emergency fund?

If you don’t, the time to build one starts now.

With a financial buffer in place, you can stay afloat when the time of dire need comes even without taking a loan.

Protect yourself from the uncertain. It pays to be prepared for the unexpected.

Setting up an emergency fund is a crucial step toward a good financial future.

Want to save for your emergency fund? Try these tips:

McKinzie is a mom of two, and a personal finance enthusiast. She loves teaching other moms how to save money, make money, and take control of their financial situation. She has started five profitable businesses and in college, she double-majored in Financial Planning and Psychology. You may have seen her in publications like Forbes, The US Chamber of Commerce, Yahoo Finance, Money.com, The Penny Hoarder, & more.