This is part of a series of posts on 10 Important Financial Lessons To Learn While You’re Young. A new lesson will go up every Friday. And if finances bore you, don’t worry…I’ll keep posting non-finance things on Mondays!
When “The Unexpected” occurs, it can be terrifying and stressful. Nobody likes to be caught unprepared. Whether it’s a flooded basement or a car accident, it’s never quick, easy, or simple to deal with an emergency.
One easy thing you can do help alleviate some of the stress is to set up an emergency fund. While having health insurance can help with medical emergencies, having an emergency fund is like self-insuring against any kind of emergency, medical or otherwise.
Like it sounds, an emergency fund is money set aside for use only in an emergency. There is a little bit of leeway in how you define “emergency”… If your car dies, does that count? Maybe it does, if you absolutely need it to commute to work every day, but maybe it doesn’t if you take public transit and don’t use the car very often.
The point is to have money set aside for emergencies, however you want to classify that. But I strongly suggest you be fairly discriminating in your definition of emergency. It would be a huge bummer if you used the money to remodel your kitchen because it’s been bugging you for years, only to have your roof collapse from a bad storm the next week.
Why do I need an emergency fund?
I hope this one is fairly obvious. You need an emergency fund because anything can happen, and there are some things you just never think to prepare for.
So how much should I have in my emergency fund?
This is the big question, and unfortunately there is no hard and fast answer that is true for everyone. Personal finance bloggers all have varying opinions, anywhere from $1000 to a full year’s salary, but I suggest somewhere in the middle of that range at a minimum. My advice is to have a couple of month’s worth of expenses covered, which for most of us is more than $1000. Our emergency fund is at $5000 right now, and I’m okay with that, though I’d like to push it up higher in the next year or two.
Where and how do I save that money?
I suggest three criteria when looking for a place to start your emergency fund:
- somewhere that earns you interest (not under your mattress)
- somewhere that is easily accessible (if you need the money on short notice)
- somewhere that isn’t too easily accessible (so you aren’t tempted to spend it)
So basically, not in a checking account that has a debit card you carry around with you, not in some sort of retirement account where there are penalties for early withdrawals, and not in a long term Certificate of Deposit or anything like that. We have ours in a high-interest savings account with an internet bank, and it works great for us.
Start your emergency fund with just $100, and set aside $10 or $20 a month to add to it. Again, like with learning to pay yourself first, anything you can save now is great, and you can always push that monthly amount up later on once you’re used to living without it.
The best advice I can give is to start saving now. Though $100 probably won’t cover any real emergencies, it’s $100 you can put towards that cost that you didn’t have before. Just do it!
Do you already have an emergency fund? (Good for you!) Have you ever had to use it? How much is “the right amount” for your emergency fund?