An emergency fund is a highly liquid fund used to cover unexpected occurrences or financial surprises. Highly liquid means its easy to spend. We have a 3 part emergency fund. We have a cash emergency fund, a bank account, and an investment account that is fairly easy to liquidate. Additionally we also have an emergency credit card that just we never use. It just sits in our wallets in case something comes up or we get in a bind, and our other backups fail.
Cash Emergency Fund
We keep about 1/3 of our emergency fund 100% liquid in cash. There are times when you can only pay for things in cash. As technology increases, some are going away from cash, but a tech outage event, like the 2021 Texas Polar Vortex, you won’t be able to use a credit card. If you do need to spend some money digitally, you can always take your cash to the bank. Or if you have some emergency fund in the bank, you can use that for your needs. For your cash fund, we recommend that you have big bills and small bills in this cash emergency fund. If you’re in a cash only situation, people may or may not have change, so its good to be prepared.
Savings Account Emergency Fund
A lot of people recommend only having your emergency fund in a savings account, largely because it’s generally a very liquid option for storing your money. It’s also a bit more secure than putting cash under your mattress. It’s fairly easy to get money from a savings account. It can be transferred digitally almost instantly. For 99% of things, a savings account works great. For the other 1%, you’ll need cash. You can automate putting a piece of your paycheck into an emergency fund savings account if your work does direct deposit, which helps to develop that fund and allow it to grow without any effort on your part.
Most savings accounts don’t offer much if any interest rate, but some are better than others. If you’ve got cash in hand, we recommend looking into some online bank accounts. One of the very best interest rates we’ve found has actually been with Robinhood, which also do some investing with. They have the same SIPC protection of $500,000 that other financial institutions have, but like I said, have better interest rates. You can even get a debit card for it like you would with any other checking account. If problems are local, and power is down, you can use your cash fund. If you can’t access your digital funds, money won’t mean much at that point anyways, so it won’t matter if your money is in a local bank, or an online bank. You might as well make more money from your money in the mean time.
Investment Account Emergency Fund
We do not recommend pulling from a retirement fund for emergencies. We try to pretend that money doesn’t exist. This should be the very last money you touch if you’re planning on retiring some day.
I invest some of my emergency fund into index funds in Robinhood. I actually have it automated so it will put a set amount of money into the S&P 500 index fund with every pay check, which is really easy to do in the app. You can automate any investment in that app, which is one of the things we really like, including cryptocurrency.
On top of that, there are no trading fees, and you can generally get all of your money out within about a week. If you sign up with my LINK you’ll also get a free stock. If you need large amounts of money, something our cash fund and our savings account won’t cover, generally things can wait at least a week. You might as well make a little return on your investment in the mean time.
I had automated this portion of my emergency fund while I was in college, and the interest grew by $200 while I was a student. A good portion of students didn’t even have $200 consistently in their bank account. That was the equivalent of a months worth of groceries at the time. If you can have your emergency fund growing, but still semi-liquid, it’s a beautiful thing. The important thing is to have enough money set aside in cash and or a bank account to cover the short term financial problems so you can draw from the invested emergency fund for the longer term stuff.
How Much do I Need in my Emergency Fund?
The obvious answer is- enough to cover your emergency needs. That’s not an actual number though. We like the advice given by Dave Ramsay in his book Total Money Makeover, which is a good book on getting out of debt and has helped a lot of people getting on top of their finances, recommends that you start with $1,000, and get that amount ASAP, and then build that up to 6 months to a year as you’re able.
From here we recommend developing your emergency fund to 6 months to a year, depending on your personal situation and what other preparing you’ve done. That exact amount depends on your living situation, and on ongoing outside factors.
How long does an emergency fund need to last?
Your emergency fund amount and needs varies by your situation, and on your emergency. If you lose your job or are unable to work, you may need that fund to last a long time. If you blow out a tire on your car and just need a new one, that’s a much easier emergency to plan for. Your emergency fund needs to last as long as your emergency lasts, and preferably longer. If you face a couple unexpected expenses in quick succession, you won’t want your first emergency to wipe out your emergency fund. On that same note, if you have to take money from your emergency fund, you should replace that money as soon as possible.
“You need that safety net between you and life.”
Dave Ramsay
What Should I Use My Emergency Fund For?
You should use your emergency fund strictly for unexpected problems that your savings can’t cover. Things like losing a job, a vehicle repair, an appliance breaks, you get sick, hurt, or have to care for a family member and cannot work. Things like that. A sale at Old Navy isn’t an emergency. You also shouldn’t overspend your regular budget on frivolous things so you have to dip into your emergency fund.
What do I need to account for in my emergency fund?
- Major car repairs
- Unforeseen medical expenses
- Repair or replacement of home appliances or other fixes
- Unemployment expenses which includes
- Housing
- Food
- Utilities
- Insurance
- Other bills
- Miscellaneous
Most car repairs, medical expenses, and even home appliances or repairs can be financed. I personally hate debt, but you do what you’ve got to do in an emergency. Having the first $1,000 in your emergency fund will give you a lot of options for this. The bigger numbers to account for is unemployment. You may qualify for a government unemployment benefit, but you might not. You can’t count on it. There’s no shame in applying for and receiving an unemployment benefit but because being self reliant means you’re ready to take advantage of all available resources, but at the end of the day, if you can’t get the other resources, you need to be ready to take care of yourself. The following should help you determine exactly how much you need to have to account for one month of being out of work. The number is probably higher than you’re thinking.
Housing
Do you pay rent? Do you have a mortgage payment? What is your payment? Do you have mortgage insurance you need to account for? Most people don’t like to be forced to downsize, but it’s always a good idea to have an idea of your home value and what your other options are. If you’re renting a 3 bedroom, you might want to go to a 2 bedroom. If you don’t think you can, early settlers lived in really small houses, really just one room cabins, with really big families. It’s not as comfortable, but you can do it. You might not want to, but know your options and be prepared to do what you’ve got to do.
Food:
How is your food storage? If your current goal is 6 months, and you have a 6 month food storage that you’ll only need or want to supplement with fresh items or milk and eggs, your emergency fund can last longer, or you won’t need as much for food. If you haven’t started your food storage, here’s a link to a Basic Guide To Start Your Food Storage for Less Than $100. Should you be unable to work, it’s the perfect time to dig into your food storage. My family did a experiment one month and we were able to spend less than $100 for a month while living on our food storage. If you’ve got everything you need, you won’t need to spend emergency fund money on that.
Like we mentioned before, you should be ready to take advantage of every available resource. Identify your local food bank. Generally, if you’re dipping into your emergency fund for unemployment, you may want to consider getting assistance from your local food bank. Having helped start a local food pantry in my area, this is exactly what they are there for and what their mission is. They don’t judge, and if you need help, get help. Pay it forward when you’re able. There are organizations out there that can help you with your housing/rent, but not as easy, and there are way more organizations out there that will help you with food. That’s why this is second on the list, and not first.
Utility Bills
Gas, electricity, water, sewer, trash, internet. You can potentially cut internet, or consider reducing your speeds, depending on your contract, and on what you may need to find employment. Internet is pretty crucial to my line of work. Luckily for me, I live in a place that offers a free low speed internet connection. Most people aren’t so fortunate. If I have to dip into my emergency fund, I’m going down to low speed internet until I’m back on my feet. We’d also cancel any streaming subscriptions, though we only pay for Audible.
For your other utility bills, look at how you can be more efficient. Live like you need that bill to go down, but plan on your monthly utility bills to cost 10-20% more. Plan for things to be worse than they’ll likely be and set yourself up to be prepared or pleasantly surprised.
Insurance
Things can go from bad to worse in a heartbeat. Don’t let it get worse by letting your insurance lapse. When determining how much should be in your emergency fund, look at not only your premiums (monthly charge) but also your deductible and copay. If you’re out of work, and paying medical bills, and happen to have a vehicle problem, or your house gets flooded all at once, you’ll be in a pretty rough spot. The goal of having an emergency fund is to never be in that type of tough situation.
Loan Payments
Look at how much you pay for any loans and be prepared to cover that amount. We also strongly recommend doing your best to minimize the amount of debt you live with. If you have no debt, you won’t need ANYTHING in this amount. We realize not everyone is there yet, but its a worthwhile goal, and one that helps you be more secure and sleep better at night.
You can get a student loan deferred for up to 3 years if you are unemployed and unable to find employment. You can also get medical debt forgiven by hospitals, or you can negotiate with debt collectors if you need to. My wife had 80% of her medical debt forgiven when we were broke college students. Ask.
Medical Costs
Publicly owned hospitals can’t turn you away if you need care, whether you can pay for it or not. Identify the publicly owned hospitals near you. If there aren’t any good publicly owned hospitals, you’ll still need to know what is available. Almost no hospitals will turn you away if you have needed medical care. Your 6 month emergency fund should include some money for medical emergencies. I like to plan at least enough to cover insurance for me and my family. If I lose my insurance with my job, I want to be able to continue to pay it. If you have financial troubles, most medical places are willing to work with you. I’m not going to spend my last dollar on medical expenses if there are options to not pay immediately, but if I have bad luck, I don’t want a rough patch to linger or cause me grief if I can avoid it.
Should I use My Emergency Fund to Pay Off Debt?
This depends on the debt and on how much of your emergency fund you’d be spending to do it, and on the amount of freedom you’d get from it. A credit card probably has a really big interest rate. If you’ve got a $2,000 credit card bill and a $10,000 emergency fund, you may want to consider paying it off. If you’re going to just rack up another $2,000 of credit card debt next month, you won’t be solving the problem and you’re living above your means. Stop it. If it gives you more freedom without leaving you unprepared, do it. If its an excuse to play, don’t. Be smart. NEVER let your emergency fund fall below $1,000 if its not an emergency. If it is an emergency, try to stretch that last $1,000 just as far as you can.
If you want to learn more about developing an emergency fund, I STRONGLY recommend getting Dave Ramsay’s book, Total Money Makeover. I don’t agree with 100% of that book, but I love what it says about emergency funds, and I agree with probably 95% of the book as a whole. It teaches sound financial principles that anyone can apply and have success and peace of mind.
Student Emergency Fund
Should a college student have an emergency fund? Absolutely. Other than tuition (which is absurdly expensive) most cost of living expenses are significantly lower than most, but you can go through the calculator above to determine what your costs should be. Another thing you need to determine is how dependent are you on a parent or guardian? If you are still being supported, you might not need as much- generally just enough to hold you over until you can get help. How much help can or will your parents provide? This is another question you need to answer as a student when determining how much you should have in your student emergency fund.
If you are trying to help you children set up an emergency fund, I would first help them understand basic financial principles and financial self discipline. If you help them out with a $500 emergency fund, and that turns into a frat party fund, it’s not going to do them much good. My little girl will never have Daddy’s credit card, but I’ve got enough in my emergency fund to take care of her. Take an honest look at your kid and determine what is best for them. When I got married, my parents gave me a start to my emergency fund along with the Total Money Makeover book I’ve been mentioning. Smart move mom and dad.
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