If there’s one thing living through 2020 taught us all, it’s that you definitely need an emergency fund. Why? Well, because you never know what’s going to come your way (hello, global pandemic). But even after all of that, 36% of Americans still say they can’t cover a $400 emergency. 1
Wouldn’t it feel great to have a buffer between you and the curveballs life throws at you-a safety net that helps you sleep soundly because it turns a major life crisis into just a slight inconvenience? Even if your AC goes out in mid-July, you’re cool as can be. Why? Because your emergency fund has your back!
What Is an Emergency Fund?
An emergency fund is simply money you’ve set aside for life’s unexpected events-sometimes people call it a rainy-day fund. But whatever you want to call it, this emergency savings can take care of whatever life tosses your way.
Now, I’m talking about true emergencies here, like a car accident, a hospital visit or a cracked tooth. A BOGO shoe sale isn’t a good reason to dip into your emergency fund, you guys. This thing should only be used when there’s a real emergency you need cash to cover.
Why Do I Need an Emergency Fund?
The reason to have an emergency fund is simple: You don’t know what’s going to happen. You’ll be so thankful you have that emergency money if you suddenly lose your job or get in a fender bender.
Don’t let yourself be caught off guard! If you don’t have emergency savings, you’ll be way more tempted to buy into a credit card scheme or loan pitch. Don’t do that. Instead, get this emergency fund squared away. You need that safety net between you and life.
Our State of Personal Finance Study shows that 60% of Americans have dedicated emergency savings or a rainy-day fund. That’s so encouraging to hear. Take a hint from them and get started working on your own emergency savings.
How Much Should I Save for My Emergency Fund?
Let’s talk about how much to save for an emergency fund. If you have consumer debt, I recommend saving a starter emergency fund of $1,000 first. Then, once you’re out of debt, it’s time to beef up that amount payday loans Kenton Ohio and save three to six months of expenses in a fully funded emergency fund. This is the path we teach in the 7 Baby Steps, which is our proven plan for getting out of debt and building wealth.
If you’re trying to decide how much to save in your fully funded emergency fund, a good rule of thumb is this: The more stable your income and household are, the less you need in your emergency fund.
If you’re part of a two-income household or you’ve had a steady job for several years, then three months of expenses in your emergency fund is probably just fine. But if you’re a one-income family, you’re self-employed, or you earn straight commission, then a six-month emergency fund is better for you since a job loss could make you unable to pay the bills.
You should also aim for a six-month emergency fund if someone in your household has a chronic medical condition that requires frequent visits to the doctor or hospital. Even if there’s room in your monthly budget to pay for the expenses, it’s good to be prepared in case a big emergency hits.
Where Should I Keep My Emergency Fund?
When you’re trying to figure out where to keep that emergency fund, remember this: Your emergency fund should be liquid, meaning you need to keep it in a place where you can get to it easily and quickly. The best options are: