If you’ve ever listened to Dave Ramsey or ventured along the journey of personal finance, you’ll hear a lot of people talking about the importance of an emergency fund. An emergency fund is money that you have readily available, usually in a savings account, in case you incur some type of emergency or unexpected expense. If the air goes out in your home, your car breaks down, or heaven forbid you lose your job, you can quickly access money in your emergency fund to cover expenses.
Many folks have found emergency funds to be quite useful. We can’t always predict when we will incur various expenses but most of us know that they will inevitably occur. Emergency funds help lessen the shock. If the brakes need to be replaced on your car or your iphone stops working, yes you may be annoyed and inconvenienced, but with an emergency fund, the expense itself stings a little bit less. When you know you have money to cover the costs, you tend to be less stressed or bothered by these unexpected expenses.
Is an emergency fund necessary?
For those of us who are still building wealth or who may be 1 or 2 paychecks away from being unable to pay our bills, then yes. An emergency fund is necessary. If we are going to build wealth or at least become financially stable, we have to minimize our need to take out high-interest consumer debt, like credit cards, when expenses arise. One way to do that is to save money in advance, via an emergency fund.
How much do you need?
Like a lot of things in finance, it depends. How much money do you already have saved or invested? How reliant are you on your paycheck to pay your bills? How stable is your job? How consistent is your income? Do you spend most of your paycheck or do you frequently have money left over?
The general rule of thumb for young professionals is to start with $1,000. $1,000 is usually enough to cover minor car repairs, a new phone, a laptop, or a last-minute flight home. As prices have risen lately, perhaps $2,000 is a more accurate number. Regardless, the point is to start off with a reasonable amount to cover expenses and unexpected costs.
The next step, and where most people land, is to save up 3 to 6 months’ worth of expenses. Notice I said months of expenses, not full paychecks. You need enough to cover you in case you lose your job unexpectedly, have to quit, or get laid off. The importance of having this type of emergency fund was ever so present in March of 2020 when the world shut down from the COVID pandemic and even folks with stable jobs, like doctors, were forced to take pay cuts or close their clinics for months at a time. Having money that you can tap into during unexpected times like this is key. The exact amount is up to you.
How do you save up this money?
Unless you have an extremely high income, it may take time to save up this emergency fund. And that’s okay. Most people have to save money from several months’ paychecks in order to reach their desired amount. When I first started my emergency fund, I wasn’t making much money and I was always tempted to spend that money on something else. In order to prevent that from happening. I had a certain amount from each paycheck deposited into an entirely different checking account. I used some of the money in that separate account to pay down debt and left the rest of the money in the account to build over time as my emergency fund. Before I knew it, I had saved $1,000. It increased even more from there.
To summarize, emergency funds can be quite useful, especially when you are starting out in your career. Having money to use in emergencies prevents you from having to take out high interest credit cards when expenses occur unexpectedly. Tell me, have you started saving for an emergency fund?