Your Emergency Fund Could Save Your Financial Life
We are always told that we need an Emergency Fund, but why? How much are we going to put in there? Where should I keep the money? Should I save or pay down debt first?
We have the answers to all those questions and more, and we want you to think about starting your Emergency Fund right away.
What is an Emergency Fund For?
An Emergency Fund is a stash of cash set aside for the specific purpose of getting you out of a jam if an emergency should occur. Imagine a scenario where your car breaks down, you’re late for work, then promptly fired as you arrive.
- What in the hell would you do?
- How much money do you have saved up?
- Would you survive this situation in your current economic state?
An account set aside to help you when something like this happens is very prudent and we would even say required.
This money is liquid and ready to go for any emergency you may have. If you are living paycheck to paycheck, then you cannot afford a disaster like that to happen.
The consequences to not being ready can devastate your entire financial life.
How Much Should I put in an Emergency Fund?
How much you put into these accounts depends on a few factors. We personally recommend about 3 months worth of living expenses or income.
In our case that ends up being about $4000 at a bare minimum.
We have been focusing on debt paydown and have slowed our savings rate, so we ultimately have about $2500 as of this writing.
Is that enough? Probably not.
If I were to lose my day job, or if Ashley lost one of her two jobs, we would be hurting pretty badly based on the amount of bills we currently have.
If you’ve read our posts before, we are fairly lower middle class, and don’t have a lot to spare.
We are fully aware that our Emergency Fund should be larger and more robust.
That is why we recommend that you have at least 3 months of cash set aside.
You want to avoid using credit in an emergency situation which could get you into even more trouble down the line.
Where Should I Put My Emergency Fund?
The best place to put liquid assets for quick retrieval would be in a high interest savings account. This account should pay at least 1% or more on your funds.
This is a decent rate, but it isn’t enough to keep inflation at bay.
That is why we recommend only 3 months worth of cash in these accounts. Anything more should be going to higher interest or higher return investments.
Here are the accounts we recommend right now:
Capital One 360 offers 1% A.P.R and is the account we have used for many years.
Discover currently offers a 1.65% A.P.R. with no minimums and their customer service is very highly ranked.
Synchrony Online Savings Bank offers a 1.75% A.P.R. and is an up and comer in the high yield savings account arena.
Make sure you set up automatic saving to get your account funded and ready for when you need it.
Best Practices on Saving
We all have trouble saving, but it is in our best interest to make sure that we fund this Emergency account.
Automatically setting aside money on payday makes this effortless, and if you do it right, you may never notice the money is gone.
If you are very low income, you’ll have to cut back a bit in other areas to fund the account, but it is even more imperative that you have these funds ready.
The Emergency Fund should never be used outside of an emergency. We don’t want to get in the habit of burning through it for small time needs. If you are truly in an emergency situation, like job loss, medical emergency, loss of transportation, or an emergency involving your family, you’ll count your blessings to have this money available.
Having an emergency account will give you the peace of mind that there is a cushion when you fall.
Make saving in this fund a priority over paying down debt right away. In other words, make sure that you have enough set aside to give you cushion and then set it on autopilot until it is fully funded.
The debt will be there when you return to prioritizing it. You can never be too careful in having your Emergency fund ready to go.
We can’t plan for everything in life, but we can make things easier by setting up our own insurance.
You want to insure that your family has 3 months worth of cash set aside for the hurdles life throws at us.
Creating and funding this account could be the most important thing you do, and is our highest recommended action tip.
Don’t let life sneak up on you and take everything you’ve been building. Stop living paycheck to paycheck and keep hustling forward!
Do you have an Emergency Fund set up? We have heard other people recommend 6 months or more in these funds, what do you have? Comment below and give us the scoop!