Updated: Feb 11
Yes, You Need an Emergency Fund
You just got paid yesterday and after paying the mortgage, groceries, power bill, cell phone bill and the kids swimming lessons you have about $35 left in your checking account until the end of the month.
Your driving down the road and your car start making strange noises. You’ve been ignoring the yellow check engine indicator for weeks. You know you should have taken it in for a checkup weeks ago, but money is tight. Then it happens, the car dies on the side of the road.
This is why you need an emergency fund. You never know when life is going to kick you square in the pants, but we do know it will happen eventually. When it does, it’s nice to have some cash on hand.
How much Money Should you have in an Emergency Fund?
This is a question of much debate. Many financial experts recommend having 3–6 months' worth of living expenses held in cash, in case of emergency.
If that sounds like a daunting task, make it a goal to set aside 1-month worth of living expenses and then build from there.
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How to save 3–6 Months Worth of Expenses
Step 1: Track your expenses.
How will you ever know how much money is required to cover 3–6 months' worth of living expenses if you don’t know how much money you spend every month?
If you want to know how much money you spend every month print off your bank and credit card statements for the past 6 months and take the average of every penny you spent each month.
It will be a pain in the ass, but you will learn a lot about your money (and yourself) by tracking where it goes every month.
Once you have your average monthly spending’s calculated multiply that number by 3–6.
If your average spending’s over the past 6 months was $3,000 per month you know you’ll need $9,000-$18,000 in your emergency fund.
Step 2: Create a Budget that Includes Monthly saving for an Emergency Fund
A budget is simply a reflection of your priorities.
If having a 3–6 month set aside for an emergency is a priority that needs to be reflected in your budget. Don’t tell me having an emergency fund is a priority if you have not budgeted monthly contributions to build up your emergency fund.
Once you have gone through the last 6 months of spendings, you’ll have an idea of which things you spend money on that provide no value to your life. If you’re struggling to find money to set aside for your emergency fund while at the same time spending $300 per month at Starbucks, something has gone wrong.
Once you’ve budgeted for all your mandatory living expenses, the first line item in your budget should be for your emergency fund. You can budget all your non-mandatory spending around whatever is left.
Should you Bother with an Emergency fund if you have Debt?
If you are trying to get out of debt it can be tempting to throw every single penny you have against the debt.
“Once I have this debt paid off, then I’ll set up an emergency fund”
In theory, that sounds like a good idea. Debt is bad, so the faster we get rid of it the better, right?
If you don’t have cash on hand in case of emergency, you leave yourself vulnerable to loading on more debt.
Let’s say you’ve spent the last 6 months throwing every penny against your credit card debt. You’ve been doing a great job paying it down and are starting to feel good about your financial situation. Then it happens. Your car breaks down and you need to pay the mechanic. Where are you getting that money from?
You are borrowing it.
You’ve spent the last 6 months paying off debt, and now the debt piles back up. That can be a deflating feeling and even causes some people to give up.
The entire point of getting out of debt is not just to get out of debt but to stay out of debt. The best way to ensure you stay out of debt is to build some savings as you pay off the debt.
Building an emergency fund first might mean it takes you longer to clear your debt. It could also save you from being in a situation where you have to borrow more money to cover unexpected expenses. If you have a strong emergency fund set up, your chances of staying out of debt are much higher.
Once your emergency fund is set up, then you can go all out on paying off the debt, once and for all. Read this story to learn 3 strategies to become debt-free.
Have you ever been in a situation where having access to your emergency fund paid off big time? Let me know in the comments.
This article is for informational purposes only, it should not be considered Financial or Legal Advice. Not all information will be accurate. Consult a financial professional before making any major financial decisions