CRASH COURSE: Emergency Fund 101
31% of Americans have less than $500 in emergency savings. WHOA! I can imagine that even more Americans have less than $1000 in emergency savings. Having an emergency fund can prevent an inevitable “emergency” from being a haunt-you-for-years financial emergency.
What an emergency fund IS:
1. Money placed in a savings account to be used for unplanned expenses, such as the unexpected loss of a job or car accident.
What an emergency fund is NOT:
1. A saving account you take money from when you want to buy some new shoes, take a spur of the moment trip, or budgeted incorrectly.
Having an emergency fund in place will give you confidence that when the unexpected happens, you’ll be prepared. You can keeping paying down your debt while not becoming derailed or losing motivation when something pops up.
Where to Keep Your Emergency Fund
So where should you keep your emergency fund? Since this money should be used for true emergencies (not just things ya wanna buy on the fly), it’s most beneficial to keep your money somewhere that is NOT within easy access. Personally, I’ve found that keeping my emergency fund at my childhood credit union, where transferring money is difficult and I don’t live near a physical location, as been helpful in preventing me from accessing this money for things other than emergencies.
Tips for deciding where to keep your emergency fund:
Don't keep your emergency fund at your normal bank. It’s too easy to transfer or spend the money when you’re seeing it regularly.
Keep it in a savings account and not a checking account. No debit cards or check to tempt you!
Consider a high interest savings account, like Ally. It's online, too, so you won’t (hopefully) be reaching into this pot often. The least you could do is earn some interest!
How Much to Keep in Your Emergency Fund
Okay, okay, now the question you've been waiting for… how MUCH should you keep in your emergency fund?
Dave Ramsey recommends $1,000 (which is what I’ve chosen to go with) however this is a personal decision and you should be sure to give it some thought! The amount you choose to have in your emergency fund may vary due to several different factors which should be taken into consideration.
How many people is your emergency fund supporting? In my case, it’s just me. When my fiance and I get married, we may choose to increase the amount. If you have kids, perhaps you’ll find that you’ll want even more in your emergency fund.
Do you live in a high cost of living area? The amount you’ll require in an emergency will likely vary if you’re in North Dakota versus if you’re in New York.
If you’re married, are you living on one income? If so, the amount you may require due to the loss of a job may be greater.
In Summary:
Emergency funds are critical to avoiding getting deeper in debt (via spending on credit cards or taking out loans) when emergencies strike. You should keep your emergency fund somewhere you can’t access easily so you won’t be tempted to use the money on things that aren’t true emergencies. Reputable, high-interest, online savings accounts, such as Ally, are good places to consider. The amount you’ll want to keep in your emergency fund may vary based on how many people you’re supporting or where you live. While the amount and where you choose to save is important, the most important thing is that you have an emergency fund. Decide on an amount and get to saving!