An Emergency Fund And Your Peace of Mind

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Having an emergency fund is probably the most important step toward attaining financial freedom and some peace of mind. It is the foundation of your family’s finance. An emergency fund is not something extra or optional but a necessity for you or your family’s financial well-being.

Having a healthy emergency fund is now more important than ever. The recent Coronavirus outbreak has shown us the importance of having an emergency fund and the difference it makes when a crisis hits.

The economic fallout caused by the Coronavirus pandemic has been swift, with investors, service-industry workers, retailers, and small business owners taking an especially hard hit while the rest suffered from some sort of financial setbacks or stress. The current economic climate highlights the importance of having emergency cash reserves at any income level.

An emergency fund gives you much needed peace of mind – knowing that you can cover unexpected costs without having to dip into your long-term investments in the stock market or accumulating high interest debts on credit cards.

It is a safety net for you and your family. You will breathe easier and sleep better when you know you have a safety cushion to fall back on in case of an emergency. Not having one in place will make things more stressful for you and your family to deal with, and can even ruin your overall financial health.

So, What is an Emergency Fund?

An emergency fund (AKA a rainy day fund or a 911 fund) is a cash reserve that is put aside to cover the unexpected and often large expenses in the future.

Emergency savings are meant to be used for real, urgent needs — like to pay rent or mortgage when your income dries up or to pay a sudden medical bill without having to rack up a balance on your credit card, take out a high-cost loan or tap into your home’s equity or retirement savings.

Why Do You Need an Emergency Fund?

Having an emergency fund in place will reduce your money stress significantly. Unexpected financial events can come in many forms, at any time. Perhaps you lost your job unexpectedly, have a major home or car repair, or medical costs to pay for. Severe weather related damage is a strong possibility, too. Besides, in today’s economy, pay cuts are very common when businesses suffer major hits to their revenue.

Also, when a recession hits, the single greatest asset in your financial toolkit is an emergency fund. If you feel like your job, health, or investments are at risk, a cash reserve is your first line of defense against high-cost debt and any further financial ruin.

From my personal experience I know that it’s essential for everyone to have an emergency savings account, regardless of your income or wealth, because unexpected expenses and situations can happen to anyone, anytime when it’s least expected.

How Much You Need to Save in Your Emergency Fund

There’s no one-size-fits-all answer to how much you should have in savings. Ideally, one needs to save 3 to 6 months’ worth of fixed living expenses in cash as an emergency fund. If you are a one-income family, consider the higher end, and if you are in a two-income family, you can go for the lower end.

Some people are comfortable with more, some are comfortable with less. The point is to have enough money to support you and your family in a worst-case scenario, such as temporarily losing your source of income.

Your personal situation will dictate how much cash you will need. The amount of cash you need in a rainy day fund varies person-to-person, and depends on things like your age, job/business type, your family’s monthly basic needs, your health or medical condition, when you plan to retire and your tolerance for risk.

If you are concerned about losing your job in this economy or are self-employed, you may need more in your savings, perhaps a year’s worth of living expenses. The more you can save, the better it is considering current economic climate.

One of the biggest financial shocks for anyone is the loss of a job. So, the less stable your income is and the harder it could be to get another job in your industry right now, the more you need to save in your emergency fund.

According to the U.S. Department of Labor, the average length of unemployment is about 22 weeks. Most financial experts recommend that you save enough cash in your emergency savings so they could cover a setback at least that long. I know saving that much could be a daunting task for many. In that case, one month’s worth of take-home pay is a good start as an initial goal.

Some experts say, if you are drowning in debts, saving just $1,000 in your emergency fund is enough to cover most of your small emergencies for now. Plus, it’s a small number to start with and easier to save if you have high-interest credit card debts to pay off. But that’s not an ideal number to live with for long. We live in uncertain times with uncertain economies, especially in the wake of the Coronavirus. Corporate loyalty doesn’t exist anymore, and unemployment can happen unexpectedly, usually at the worst possible moment. So, as soon as you get rid of your debts, focus on building your emergency fund according to your situations and needs.

The first step is to determine how much your family spends each month. Housing, transportation, and food will likely be the categories that eat up most of your income. Once you know your total monthly expenses, start by calculating your bare minimum expenses for any given month, eliminating any non-essential recurring costs, and multiplying that number by 3 or 6 or 12. Reaching that number will be your initial goal.

For example, if your family’s monthly take-home pay (monthly net amount of income received after the deduction of taxes, benefits, and other voluntary contributions from a paycheck) is $4,000 but your bare minimum monthly expenses add up to $3,200, then you need to save $3,200 x 3=$9,600 in your emergency fund, not $4,000 x 3=$12,000.

What Things You Can Do to Start Saving in Your Emergency Fund

Saving for emergencies needs some sacrifices and creative efforts. Downgrading your cell phone service, cancelling your expensive cable package, buying and driving a less expensive car, preparing meals at home instead of dining out frequently, doing a part-time job, and going for a minimalist lifestyle are some easy ways to come up with extra cash to fund your savings plan.

Saving your next tax refund, bonus or extra paychecks are also achievable methods of adding to your emergency fund. Also, if you just paid off a big debt, such as a personal loan or an auto loan, put that newfound money into your fund until you reach your savings goal. Once you have fully funded the account, explore other ways you can use your extra cash. But as far as the emergency account goes: set it and forget it until a real emergency arises.

To help keep your savings goals on track, make your emergency fund contributions part of your monthly budget. Treat it just like another must-pay bill. Dedicate the appropriate amount from your paycheck and set it aside.

Automate your savings. Making automatic deposits each month is easy and painless. Just choose the amount you can manage to contribute to your emergency savings account, and then set up a direct deposit to take the money out of each paycheck. You can also set up an automatic transfer each month from your checking account to your emergency fund.

Once you save enough money in your rainy day fund, you will find yourself stressing less about your finances and enjoying more peace of mind.

Where to Keep Your Money

You need to save and keep your money in a safe place where you can easily access to your fund in case of an emergency. Because your emergency fund is meant for sudden events, you will want to make sure you can access your savings without any delay or difficulty. However, it may be best to separate this fund from your other accounts to reduce the temptation to dig into it for not so urgent spending. Plus, keeping your emergency savings in a secure bank account protected by FDIC insurance, as opposed to stocks or other investments, means your account will be insured up to the maximum allowed by law.

Do not keep your money under the mattress or in a shoe box or in your freezer or in the attic. Aside from losing out on further gain, there are limits to what your home insurers will cover if that money is stolen or lost. This is often as low as $200/$300! Keep that in mind.

The Takeaways

Your emergency fund is your safety net. Start now and save whatever amount you can, even if it isn’t much. And once you have some money saved, guard that carefully in a separate account. The best option is a simple checking account or a money market account that comes with a debit card or check-writing privileges. You should not use it for incidental expenses. Set it aside for real emergencies. Unexpected bad things can happen to anyone, and working toward your financial health should be just as much a priority as looking after your physical health.

Having an emergency fund will also provide you with peace of mind when you come face-to-face with an emergency. If you find yourself in a position where you need to dip into your emergency savings, be proactive about replenishing your account so it’s ready to meet your needs next time. If there is one thing I can assure you now, it’s that there will be another emergency – sooner or later. And when that happens, you will feel so thankful and relieved you had your emergency fund ready to help you weather the storm.