The Emergency Fund – The ONE THING Everyone Needs
[Disclaimer: this post contains referral links.]
There were plenty of times within the last few months when I felt compelled to write this post. As I was involved in family issues and heard of friends’ transitional times, I felt the need to share this one thing.
The ONE THING everyone needs to have is an emergency fund.
Now, this isn’t news in the PF community. For those familiar with Dave Ramsey’s Baby Steps, this is Baby Step Number 1! Having an emergency fund is a no-brainer for us PF nerds.
But this post isn’t for the personal finance blogosphere. This post is for those I know who claim that personal finance just doesn’t make sense to them. This post is for those who get caught up in the confusing lingo of 401k vs. Roth IRA vs. Traditional IRA, get overwhelmed, and simply give up. This post is for those who are worried about how their finances are and have absolutely no idea where to start.
beg urge you all – do not let the overwhelming world of personal finance stop you from setting up your emergency fund.
The very first thing everyone needs to have in their finances is an emergency fund.
What is an Emergency Fund?
An emergency fund sounds just like what it is – funds set aside specifically for emergencies. This fund is there for you when little snags in our life plans happen – when your car breaks down, when an unexpected expense pops up, or even if you fall victim to an unfortunate layoff at work. When these things happen, you’re going to want to have a little cash to help you as you’re working through it.
***Note – an emergency fund is not there for you “just in case” there’s a really great sale at Macy’s.
Now, some may argue that they don’t need an emergency fund – they can use their credit cards for emergencies. Heck – I was in that same boat not too long ago! But I’ve since switched over to having cash as an emergency fund, not credit. Having a liquid (meaning: easy to get to) emergency fund is best for emergency situations. In general, when in an emergency, you won’t want to have to worry about how to pay for things, let alone paying interest on top of whatever you have to spend. Cash is king in this situation, my friends.
How Much Should I Have in My Emergency Fund?
There are a lot of factors that determine how much you should have in your emergency fund. But at the bare minimum, you need to have $1,000.00 set aside for emergencies. In fact, that’s what I have in my emergency fund as of right now!
For higher risk situations – freelancers, families, etc. – you’re going to want to have a bigger emergency fund set aside. Many suggest having an emergency fund consisting of 3 to 6 months worth of expenses.
But those of us who are single and have no dependents, $1,000 is a great start. If you’re debt free – having 3 to 6 months worth of expenses is a great idea. If you’re still in debt, though (ahem like me), the bare minimum of $1,000 will do until you climb out of your debt.
Ultimately – you should at least have $1,000 in the bank. After that point is really up to you and your situation. The amount you have set aside for emergencies should help you sleep at night, not keep you up.
Where Should I Put My Emergency Fund?
You’re going to want to keep your emergency funds close so that the money is easily attainable when emergencies happen. But you don’t want your emergency fund too close in case you get the temptation to use the funds as something other than an emergency.
**Note – Do not put your emergency funds in time-restricted accounts such as CDs (Certificates of Deposit). CDs are really meant for investing, not for emergencies. Plus, there are penalties for withdrawing money early from CDs.
My emergency fund is at Capital One 360, but really you can have yours wherever you prefer. A good place to start is to see if the bank your current checking account is at offers savings accounts.
I have a separate savings account set up in my Capital One 360 account just for emergencies. It’s close enough that I can access the money without any penalties. I would still have to transfer the money from my savings account into my checking account to access it with my debit card. This transfer step, although very easy, allows me to really reflect on whether this is really an emergency or not.
I get that personal finance can be overwhelming. But please, please, please – take the time to set up your emergency fund! This is step one to financial peace. Once your emergency fund is in place, then we can start worrying about all the other stuff – debt repayment, retirement savings, etc.