This post may contain affiliate links. Please read my disclosure for more info.
Emergency fund is money set aside in case of an emergency. Job loss, natural disaster, major home repairs, unexpected medical bill, a car wreck are a few examples of emergencies.
Do you know what is emergency and non-emergency?
What is an emergency?
The dictionary definition of emergency is, a serious, unexpected, and often dangerous situation requiring immediate action.
- Job loss
- Debilitating sickness
- Car breakdown
What is not an emergency?
According to the dictionary, a non-emergency is a situation that does not require immediate action. Examples are:
- Monthly expenses
- Christmas is on December 25 every year; definitely not an emergency
- A sale. The irony is that there is a sale multiple times every month
- Vacation
Emergencies happen to everyone.
According to Bankrate financial security index survey, 34% of American households experienced a major unexpected expense over the past year. However, only 39% of survey respondents said they would be able to cover a $1,000 setback using their savings.
Do you currently have a plan to handle an unexpected expense?
Unexpected expenses come up all the time, the best way to handle this is to have an emergency fund. Think again if you don’t think you’ll need an emergency fund, think about what will happen when your transmission goes out or your air conditioner stops working.
According to the Bankrate
“While tapping savings to pay off an emergency was the most common response, more than a third of Americans would sink into one type of debt or another, potentially harming their financial security. Almost 1 in 5 would pay with a credit card and finance the balance over time; 12 percent would borrow from family or friends; and 5 percent would use a personal loan.”
Why do I need an emergency fund?
Emergencies can happen at any time, that is why you need an emergency fund. When I create a budget each month, I include a miscellaneous line item. However, in my budget, the water heater breaking down is not on my mind. If the water heater breaks down, I will need to get money from somewhere to fix it.
If the money is not already saved, I will either resort to putting the charges on my credit card or getting a personal loan. It is not a good feeling but if you already have the savings, it eases the pain just a little.
What will an en emergency fund keep you from doing?
An emergency fund will keep you from depending on your credit card or getting into debt each time there is an unexpected expense. The only way to ensure that you don’t dig yourself into more debt is to have an emergency fund.
How much should I save?
According to Dave Ramsey, you should have at least $1000 in an emergency account. It is recommended that you save between 3 to 6 months of your living expenses. The $1000 may seem unreachable looking from where you are right now, but it can be done if you put a plan in place. You can start by putting a few dollars into your savings account every month.
Things to do before you start an emergency fund.
- Set a plan.
The first thing to do before saving for an emergency fund is to set a target. How much do you plan to save? Set a realistic goal; if you set an unrealistic goal, it will be difficult to reach that goal and you will become discouraged.
There is no one amount that fits all, because our situations and expenses are different. However, I will recommend starting with $1000. When you reach your $1,000 goal, increase the amount.
- Open a savings account.
Open a savings account that is not so easily accessible. My emergency fund savings account is in a bank that has few branches, plus I declined to have an ATM card. The money is automatically saved to this account twice a month through payroll.
Automate.
You can choose to have a fixed amount automatically drafted from your checking to your savings account. Having the money transferred automatically will ensure that it is done each month. If I had to make the transfer myself, there may be things that come up that will prevent me from following through, plus I may forget.
What does the emergency fund do?
The emergency fund gives you peace of mind. Peace of mind is worth more than money.
How do I build an emergency fund?
- Set a goal
Set a realistic monthly goal based on your income and budget. Be sure to track your progress to see if you are meeting your monthly goal.
- Sell something
Sell things in your house that you don’t need. I am sure that if we all go through our houses, we will easily find things that we no longer use or need. You can do a yard sale or sell online (ebay, Poshmark, OfferUp, Craigslist, and the list goes on).
- Save your change
Saving your spare change adds up very fast. It is a family affair in our home when it comes to saving change. Have a jar designated as the spare change jar; it will fill up fast.
- Earn extra income
There are many ways to earn extra income. You can get a part time job or work from home job, do surveys on multiple sites such as Swagbucks. There are sites like Fiverr, where you can offer your services for a fee.
- Tax return
If you are getting a refund from the IRS, put it into your emergency fund. There seems to be an unwritten rule that income tax return must be spent. This shouldn’t be the case; it is okay to save your tax return.
- Cut down on expenses
Review your monthly expenses and cut down on your expenses. If you are paying too much on cable, call the cable company and negotiate. The same goes for all your other bills. Stop eating out and cook your meals at home. You can check out the $5 meal plan on ways to save and meal prep. If you want to find more ways to cut expenses, check out 30 Simple ways to cut expenses.
Conclusion
Most importantly, when an emergency occurs, knowing that there is money to cover that expense, gives you peace of mind. Therefore, you need to set up a savings account and forget about it until you have a true emergency. When an emergency happens, take what you need, and work to replenish what you took out. And if you do not have an emergency, don’t touch the money. You will be surprised to see how much you’ll save over time.
Do you have an emergency fund? Please share below how you save to your emergency fund.
Hi, I’m Ngozi, I work full time during the day blog at night and in my free time. Join me as I write about saving money, side hustle, getting out of debt, and ways to enjoy the simple things in life.
Very good article!!
Thank you!