It's easy to see the importance of a healthy emergency fund, especially in this uncertain time as the corona virus pandemic continues. But where should you start?
Let’s break it down.
What exactly is an emergency fund?
I’ll give you my definition, but I think it’s also important for you to create a definition of your own.
An emergency fund is money that you have saved and set aside specifically for emergencies. This should be held in cash for liquidity reasons, and easy to access if it’s needed on short notice. Now, I don’t mean in literal stacks of cash tucked under your mattress, I just mean it shouldn't be invested in stocks or real estate, and it’s not in some weird, faraway account that will take 7 days and your first-born child to transfer into your checking account. The best place for your emergency fund is a savings account or a high-yield savings account.
But… what constitutes an emergency? This is something you get to decide, and I suggest you know what emergencies look like for you so you can both:
a). Have self-discipline and not dip into your savings unnecessarily for stuff that isn’t actually an emergency
b). Not be hard on yourself when you DO have to dip into your emergency fund...
For every person that pulls out of savings to cover new shoes they want, there is another that is suffering in a place they hate because they feel financially strapped, yet don’t feel worthy enough to use their savings.
Figure out where you are on the spectrum and set yourself some healthy boundaries for what this money can and should be used for.
How much should be in your Emergency Fund?
You may have heard of Dave Ramsey, considering you’re currently reading a finance blog, but in case you haven’t, Dave has some ‘baby steps’ for your finances. The first is an emergency fund of $1,000. The second is to pay off all debt. Next, is building that emergency fund to a size that will cover 3-6 months of expenses.
I’m not trying to argue with these recommendations, and I think setting a goal of $1,000 for your emergency fund if you are brand new to the saving game is a fantastic goal and something to be hugely proud of when you achieve it. I also believe paying down your debt is extremely important, and might even argue that if you have high-interest debt that is crushing you financially, paying that off would even qualify as an emergency. But what we are seeing in our current economy with the corona-virus pandemic, is that nothing is ever truly certain. People without an emergency fund who lost their jobs overnight quickly entered a state of “...now what? How am I going to pay my bills?” Those with an emergency fund of $1,000 will, of course, fair a bit better- but not by much. Ask yourself, how far will $1,000 actually go if your income is suddenly turned off? And what if you’re ordered to stay indoors, or worse, sick and truly unable to leave your home?
An emergency fund that is large enough to cover 3-6 months of expenses would provide a lot more comfort in times like this.
A 6-month emergency fund is like 60 minutes’ worth of air in a tank while you’re deep-sea diving. If you have a full hour, you aren’t going to race to the surface as soon as you get in the water. You’re going to be able to breathe. You can relax, look around, enjoy the fish, and make a plan of when and how you will return to the surface. On the other hand, if you only have 10 minutes’ worth of oxygen, or less, you are going to feel panic and a tight chest every time an emergency does hit. You will stay close to the surface. You are going to be struggling to hold your head above water. Nobody likes that feeling.
The size of your emergency fund is something that is up to you and your family, and will depend on the comfort levels you have. If you have people depending on your income and a lot of monthly expenses, you will probably want an emergency fund much larger than someone who has roommates to split the bills with.
Building up that EF is easier said than done, I know. If you need some tips for saving more money check out my library of tools, specifically the “How to Fix Your Budget Starter Kit”. While opting for a packed lunch for work might not exactly be in the cards right now, reigning in on deliveries and analyzing and adjusting your food budget is still a great place to find a few extra bucks.
My final recommendation? Do the best you can. If you are in a place of “normal” right now and your savings game is looking weak, now is the time to make it a priority. Understand that making your savings a priority is making YOU a priority.
And you’re so damn worth it.
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