Most Americans, 56%, in fact, can’t afford a $1,000 emergency bill. An emergency bill could come from a necessary repair, an unplanned relocation, a medical expense, or any adventure that crops up in life. Having an emergency fund can make a world of difference for your peace of mind, your career, your health, and beyond.
What is an emergency fund?
An emergency fund consists of liquid reserves that you have set aside for unanticipated but necessary expenses. These expenses would include car repairs, unexpected medical expenses, and perhaps living expenses if you were unexpectedly separated from your employment. The key factors here are ‘necessary’ and ’unanticipated’. A vacation is not an emergency fund expense, nor is new furniture, unless the need for the new furniture is unexpected, such as the result of some home catastrophe.
Peace of Mind
Have you ever been driving somewhere, and your car suddenly starts making a strange noise? You schedule an appointment with the mechanic, but you spend hours (or days) worrying whether you can afford to pay for the required repair. Or, a nagging pain finally forces you to go to the doctor, and the result is physical therapy or perhaps a surgical procedure. The pain was bad enough, but now you have to worry about the expense as well. This is where your emergency fund comes in -allowing you take the necessary steps to keep moving forward and building your ideal life with only a small bump in the road. It helps you move on quickly from what could be a bigger setback.
Imagine that your current employer comes upon hard times and needs to lay off a number of employees–including you. Without an emergency fund, you need to take a new position as quickly as you can find one, regardless of fit. With an emergency fund, you can take some more time to seek out a position that positions you well for the future. This allows you to look at the event as the catalyst for the next step in your career rather than as a catastrophe.
How much is enough?
It depends. If you have a partner who also contributes to the household expenses–AND your partner has a different employer than you do, then I recommend three (3) months of full lifestyle expenses plus three (3) months of reduced expenses plus three (3) months of barebones expenses. You will have to decide what constitutes “reduced expenses” and “bare bones expenses”. The point is to be able to withstand a reduction in income as well as an emergency like the refrigerator giving up at the same time. If you and your partner work for the same employer, I recommend that you increase your emergency fund. If your employer needs to reduce their workforce, it is possible that you could both be out of a job at the same time.
Where should it be?
Your emergency fund should not be invested in holdings that swing in value on a regular basis. You’re not looking to grow your emergency fund by investing it. However, a high-yield savings account such that you are at least keeping up with inflation might be a good idea.
Where do I get this emergency fund from?
Most folks who establish an emergency fund don’t have all of the cash on hand immediately. You can set up the account and divert funds to your account and build it over time. If you need to tap your emergency fund for unanticipated expenses, then you’ll need to rebuild the fund when things return to normal.
Each household’s financial situation is unique. However, the peace of mind that comes with having an emergency backstop can be priceless, regardless of the financial situation. Also consider these other essential household accounts – the Events & Opportunities Fund and the Rainy Day Fund.