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When I first started paying off debt, I didn’t want an emergency fund. I wanted to jump straight into paying off debt instead! “Emergencies never happen to me, so why do I need one.” That mindset is totally wrong, because as soon as you don’t have your emergency fund, you will need it. I am so thankful that I have maintained my savings throughout the journey because I know that I would have needed it.
Having a little rainy day fund can be the most important part of getting started on changing your finances for the better. It can also give you a sense of security when your checking account is looking a little low from a large debt payment. In fact, having an emergency fund was one of the biggest things that I credit with allowing me to pay off $15,000 in 2017. At that point in my journey, I was only making about $35,000 a year, but still managed to knock out $15,000 in car payments and student loans..
Let’s start with the very basics. I will caution you with this, if you share finances with someone, this is a topic that both of you should figure out before making any long term financial decisions.
What is an Emergency Fund?
An emergency fund is really exactly what it sounds like. Extra savings put aside in case of an emergency. Before you start throwing excess money at your debt, it is a great idea to have money in savings to work as a buffer in case something were to happen.
If you are following Dave Ramsey’s Plan, he recommends starting with a “baby emergency fund” and then moving into a “fully funded emergency fund” once you have paid off all of your debts. Whether you are following Mr. Ramsey or not, having a little money set aside, just in case is an important step no matter what you are planning to do after that!
What is Included as an “Emergency?”
This is totally up to you (and your partner if you share a budget with someone else.) Things that I have seen for emergencies include car maintenance, unplanned doctors/vet visits, unplanned bills or unexpected expenses. It could be as serious as the temporary loss of a job or needing to take time off. In January, I lost one of my temporary jobs due to budget cuts. While I was lucky that I had my second job that I picked up hours, that emergency fund would have been vital if I needed to pay a few bills for a while.
Mostly, the emergency fund is set for things that you didn’t think you would have to spend money on when you needed it. Every family has a different definition of emergency, but you will have to define your own. Also, when something comes up, you will have to decide whether it is truly an emergency or just an inconvenience. Some things you can probably live without. Others are things that need to be taken care of immediately. It is ultimately up to you which is which.
How Much Should You Have?
Dave Ramsey will recommend $1000 in your baby emergency fund and 3-6 months of expenses into your fully funded emergency fund. Dave says that if you make less than $25,000 or so, to lower it to $500 if you can’t get that $1000 quickly. While I think that $1000 is a pretty average amount for everyone, I think there are a few things to consider when you are planning out your savings.
Own your home?
Have a pre-existing health condition that you may need to budget for?
How much wiggle room do you have in your budget/ snowball?
If you said no to the first three categories, you might be able to lower the amount. I personally started my emergency fund with $1000 but after a full year of not touching my emergency fund at all, I lowered it to $500 instead. I don’t own my home, so I don’t pay for any maintenance at my apartment. If something were to happen, it would be on the rental company to fix it. I also don’t have kids, which can create extra expenses in a budget. Even at $500, I can comfortably cash flow most of my unplanned expenses. I am easily throwing $1000 towards debt every month, so if I were to have an emergency, I could cover it by just lowering my monthly student loan snowball.
All of these are things to consider when you are planning your emergency fund. It is safe to start at $1000 and add or lower as needed. If you are going to lower it from $1000, I would recommend keeping it higher for at least a year. If your baby step two is going to take more than one year, that is the time to consider lowering it and throwing that excess money at debt instead of savings.
Maybe you are already debt free! If you are already out of consumer/student loan debt, 3-6 months of expenses is recommended to keep in savings. The average time that people are laid off of work (if it happens) is about 6 months. If you work in a career field that isn’t as secure, you might want it a little higher. Every family is just a little different, so take some time to decide what is best for you.
Where should I keep it?
You can really keep it at any bank, but you want it to be easily accessible. If there were to be an emergency, you want to be able to get to it. You don’t want it locked into investments or a hard to get to savings of any kind. I also don’t recommend having a bank account that has a “minimum balance required” because if you have to use your emergency fund, you might end up paying a penalty fee for using the savings set aside.
While you want your account easily accessible, you don’t want it to be too easy to get to. Keeping it at the same bank as your normal checking account an create a false sense of available money. I recommend having it at a totally different bank thank your daily use accounts.
I personally use Capital One 360 Savings. It earns about 1% interest, which isn’t a ton but it is way more than your average hometown bank. There are no start up or banking fees and no minimum amount to get started or keep in the account. There are a few different types of accounts to choose from and the process to sign up is super easy! I have earned about $4 in the few months that I have been there, which is WAY more than I have ever earned from my regular savings account. I know that once I build my fully funded emergency fund, the interest might actually show a little more!
Keep in mind, regardless of interest rates, this savings is not there to help build your money. It is not an investment account, so make sure that you can still get money into and out of it. But don’t stress too much about the interest rates.
How to build your Emergency Fund quickly
Now, $1000 may seem like a lot. Especially if you are living pretty much paycheck to paycheck like almost 80% of the United States is currently doing. But there are a few ways to get the ball at least rolling to get the where you need to be. First, open up your Capital One 360 account and deposit any savings you already have. I challenge you to find a way to get to at least $250 in the first week. This will create a solid base to start with. If you can get there, and at least leave it there, it will be easier.
Cut back on eating out for one month! You might be surprised how much you are spending on food, drinks, and fun.
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Maybe it isn’t eating out, maybe it is your grocery bill. Check out my number one secret to saving money on groceries.
Do a “No Spend Month” and see where you are spending in excess. I host no spend months every few months over on my e-mail list, so you don’t want to miss out on that!
Check out your daily expenses. Often it isn’t the big bills it is the little purchases that are killing your budget.
If you haven’t ever set up a budget, check out my very basic guide to changing your finances.
Start tracking your expenses and using cash envelopes for purchases.
Are you going to take the first steps to getting an emergency fund?
After being on this debt free journey for over a year, I am thankful that I have had my emergency fund as a back up fund. Even if you aren’t aggressively paying down debt, having an emergency fund is so important to being secure in your finances.