Emergencies are something that each and every one of us have to deal with. These are surprise expenses or ones you did not plan for. I recently experienced a pretty significant “emergency” in my household. Last week I was laid off from my job as a web developer. My salary contributed to 60% of my family’s household income and was gone in mere seconds.
Why Keep an Emergency Fund?
Before having an emergency fund, whenever a surprise would come up I would panic and then ultimately put it on my credit card with the “plan” of paying it off within the same month. Sometimes that happened but most of the time, it didn’t which lead to unnecessary interest payments. I know some of you even are forced to take pay-day loans which have huge interest rates and can cause even more trouble.
The idea behind an emergency fund is that this is money you set aside for just the occasion when you forgot a bill, had an unexpected expense come up, or even worse a natural disaster or lay off.
Being laid off from your job can be a life altering experience and can lead to complete disaster without proper planning. But guess what? I have an emergency fund which means that I can take an interest-free loan from myself in this time of need. That is right, no pay-day loan at 200% interest, no 20%+ credit card interest, just a 0% interest loan from me. My wife and I can make it 6-8 months on our emergency fund. No panic, unnecessary stress, just the thought of, what’s next?
How Much Should I Save?
I see a lot of people recommend $1,000 in an emergency fund to start out but it would be amazing how much surprises can cost. A new set of tires, a new dryer, or an A/C repair can quickly drain $1,000 from your pockets. Therefore, I recommend you not have any less than 1 month of expenses in an emergency fund and ideally closer to 6 months.
Where Should I Keep It?
Additionally, the key to having a successful emergency fund is to keep the money at a different financial institution than your other money. This follows the out-of-sight out-of-mind philosophy where you forget it exists and don’t spend it. I recommend you keep your emergency fund in an interest-bearing account with an interest rate of 1% or more. Finally, remember your emergency fund is not an investment or a vacation savings. This money is for emergencies.
Get My How to Build an Emergency Fund e-book
To help you learn more about starting an emergency fund and to get started, I have put together the How to Build an Emergency Fund e-book. This free e-book contains more information on building an emergency fund, details on my emergency fund, and my 27 day savings plan to start you on your way. Download it now.