{"id":235343,"date":"2018-01-29T05:00:47","date_gmt":"2018-01-29T13:00:47","guid":{"rendered":"http:\/\/getrichslowly.org\/?p=235343"},"modified":"2020-12-12T21:27:30","modified_gmt":"2020-12-13T05:27:30","slug":"emergency-fund","status":"publish","type":"post","link":"https:\/\/www.getrichslowly.org\/emergency-fund\/","title":{"rendered":"How and why you should start an emergency fund"},"content":{"rendered":"<p>Most personal finance experts agree: The first thing you should do \u2014 after meeting basic needs \u2014 is to establish an emergency fund.<\/p>\n<p>Life is full of unexpected surprises, many of which cost money \u2014 a thief smashes the windshield of your car, your son gets sick, your water heater overflows. When people live paycheck to paycheck without any savings, they\u2019re at the mercy of these small crises. Sometimes a tiny problem becomes a huge one because the victim wasn&#8217;t prepared for possible trouble.<\/p>\n<p><a title=\"Fender Bender\" href=\"https:\/\/www.flickr.com\/photos\/goincase\/384995672\/\" data-flickr-embed=\"true\" target=\"_blank\" rel=\"noopener\"><img decoding=\"async\" loading=\"lazy\" class=\"aligncenter green-border\" title=\"Fender Bender\" src=\"https:\/\/www.getrichslowly.org\/wp-content\/uploads\/384995672_67b1d2b1f4-3.jpg\" alt=\"Fender Bender\" width=\"640\" height=\"480\"\/><\/a><script async=\"\" src=\"\/\/embedr.flickr.com\/assets\/client-code.js\" charset=\"utf-8\"><\/script><\/p>\n<p>That\u2019s where the emergency fund comes in.<\/p>\n<blockquote class=\"highlight\"><p><strong><em>What Is an Emergency Fund?<\/em><\/strong><br \/>\nAn emergency fund \u2014 or \u201crainy-day account\u201d or \u201csafe and sound money\u201d or whatever you\u2019d like to call it \u2014 is a chunk of change set aside specifically for the unexpected things life throws your way. It\u2019s not to be used to buy a new car. It\u2019s not to be used for a vacation to Paris. It\u2019s not to be used to remodel your bathroom. It\u2019s for use only in case of emergency: a tree falls on your house, your youngest daughter breaks her arm, you lose your job.<\/p><\/blockquote>\n<p>I have a couple of friends who believe emergency funds are unnecessary. They&#8217;re wrong. Maybe emergency funds <em>are<\/em> unnecessary if you&#8217;re rich. But these friends aren&#8217;t rich. For most people, emergency funds are a form of self-insurance. They&#8217;re a <a href=\"https:\/\/www.getrichslowly.org\/becoming-proactive\/\">proactive<\/a> way of protecting you and your family from random crappy events.<\/p>\n<h2><span class=\"ez-toc-section\" id=\"how-much-to-save-in-an-emergency-fund\"><\/span>How Much to Save in an Emergency Fund<span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p><img decoding=\"async\" loading=\"lazy\" class=\"wp-image-231953 alignright\" src=\"https:\/\/www.getrichslowly.org\/wp-content\/uploads\/how-much-to-save-in-your-emergency-fund.png\" alt=\"An infographic on three steps to starting an emergency fund\" width=\"345\" height=\"862\"\/>Though personal finance experts agree emergency funds are necessary, there\u2019s no consensus on how much is enough. Here are just a few recommendations:<\/p>\n<ul>\n<li>In <a href=\"https:\/\/www.amazon.com\/dp\/0761513116\/?tag=grsorg-20\" rel=\"nofollow noopener\" target=\"_blank\"><em>The Wealthy Barber<\/em><\/a>, David Chilton argues that it&#8217;s best to have adequate insurance to cover the big emergencies, and to <strong>set aside between $2000 and $3000<\/strong> to cover small crises and the things that insurance won&#8217;t cover.<\/li>\n<li>In <a href=\"https:\/\/www.amazon.com\/dp\/0312353626\/?tag=grsorg-20\" rel=\"nofollow noopener\" target=\"_blank\"><em>The Six-Day Financial Makeover<\/em><\/a>, Robert Pagliarini writes: &#8220;Your emergency reserve is your financial cushion in case something goes wrong and you lose your job or you need access to money quickly. <strong>Your emergency reserve should consist of at least three months&#8217; worth of cash.<\/strong> Once you&#8217;ve saved enough for the cushion, you can [move on] to other goals.&#8221;<\/li>\n<li>In <a href=\"https:\/\/www.amazon.com\/dp\/1591840120\/?tag=grsorg-20\" rel=\"nofollow noopener\" target=\"_blank\"><em>You Don&#8217;t Have to Be Rich<\/em><\/a>, Jean Chatzky recommends <strong>three to six months of living expenses<\/strong>.<\/li>\n<li>In <a href=\"https:\/\/www.amazon.com\/dp\/0140286780\/?tag=grsorg-20\" rel=\"nofollow noopener\" target=\"_blank\"><em>Your Money or Your Life<\/em><\/a>, Joe Dominguez and Vicki Robin recommend <strong>six months of living expenses<\/strong> &#8212; but only once you&#8217;ve achieved financial independence. Before that, they want you to put your money toward debt reduction and wealth building.<\/li>\n<li>In <a href=\"https:\/\/www.getrichslowly.org\/book-review-dave-ramseys-the-total-money-makeover\/\"><em>The Total Money Makeover<\/em><\/a>, <strong>Dave Ramsey recommends a two-stage approach<\/strong>. First, before anything else, set aside $1000 to cover emergencies. Then, after you <a href=\"https:\/\/www.getrichslowly.org\/how-to-get-out-of-debt\/\">get out of debt<\/a>, boost you emergency fund to cover 3-6 months of living expenses.<\/li>\n<\/ul>\n<p>My own advice is <a href=\"https:\/\/www.getrichslowly.org\/do-what-works-for-you\/\">to do what works for you<\/a>.<\/p>\n<p>Start small. If you don\u2019t currently have a rainy-day fund, then <em>anything<\/em> is better than nothing. Set aside $500. Or $100. Or $20. Over time, work to build this buffer until you have $1000 or $5000 on hand for catastrophe. Ultimately, you\u2019ll sleep more soundly if you do have six to twelve months of living expenses in the bank. It\u2019s a comfort to know that if you lose your job, you won\u2019t lose your home right away.<\/p>\n<h2><span class=\"ez-toc-section\" id=\"how-to-start-an-emergency-fund\"><\/span>How to Start an Emergency Fund<span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p>Starting an emergency fund is totally non-difficult. Anyone can do it. Here&#8217;s how:<\/p>\n<ul>\n<li><strong>Pick a bank.<\/strong> I\u2019m a fan of local credit unions and community banks, but I also like <a href=\"https:\/\/www.getrichslowly.org\/best-online-high-yield-savings-accounts\/\">high-yield savings accounts<\/a> at online banks. (My emergency fund is at Capital One 360, although there are plenty of other options.)<\/li>\n<li><strong>Build a buffer.<\/strong> If you\u2019re still in debt, it\u2019s probably best not to stick a lot in savings. You should set aside $500 or $1000 to deal with annoying emergencies like a car that breaks down, but the rest of your money should be thrown at your debt.<\/li>\n<li><strong>Resist temptation.<\/strong> When you have a big chunk of change sitting in the bank unused, it can be tempting to use it for other things. Resist the urge. Use your emergency fund <em>only<\/em> for emergencies, otherwise you defeat the purpose.<\/li>\n<li><strong>Save more.<\/strong> As your debt dwindles, and as you get better control of your finances, build your emergency fund. Pick a number that helps you sleep at night. For me, that number was $10,000. That seemed like a lot of money to me (and still does!), and if anything disastrous happened, it would help me survive for a long time.<\/li>\n<\/ul>\n<p>Finally, <strong>it\u2019s wise to keep your emergency money someplace that\u2019s not too easy to access<\/strong>. (Ignore this piece of advice if you know you\u2019re disciplined enough not to use the money for other purposes.)<\/p>\n<p>You might, for example, open an account at a bank across town. Or deposit the money with an internet bank. Or put the money into a certificate of deposit. Don\u2019t carry a debit card tied to your emergency fund. You\u2019ll still have access to the cash when you need it, but you\u2019ll be forced to consider your actions before making a withdrawal.<\/p>\n<h2><span class=\"ez-toc-section\" id=\"when-is-it-okay-to-use-your-emergency-fund\"><\/span>When Is It Okay to Use Your Emergency Fund?<span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p>But what <i>is<\/i> an emergency? This is an interesting question, and one I&#8217;ve thought about a lot lately. How do you decide what is and what is <i>not<\/i> an emergency?<\/p>\n<p>Sometimes the answers are easy, of course. A vacation to Florida is <i>not<\/i> an emergency and should not be funded from your emergency fund. New boots are <i>not<\/i> an emergency, and neither is a new videogame console. On the other hand, if your only car is totaled, buying new transportation <i>is<\/i> an emergency. Or if your son breaks his leg, his medical expenses are an emergency.<\/p>\n<p>But what about all the stuff in between? What if your computer dies? Is that an emergency? Or should you just go to the internet cafe? What if the garage roof starts to leak? What if you have an unexpected dental bill?<\/p>\n<p>Ultimately, I think the key is to decide for yourself what you emergency fund can be used for and what it can&#8217;t. But once you make that decision, stick to it.<\/p>\n<h2><span class=\"ez-toc-section\" id=\"final-thoughts\"><\/span>Final Thoughts<span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p>From experience, I know that it can sometimes be painful to see a large pool of money sitting unused for months (or years) on end. But also from experience, I know that when a natural disaster strikes (or any other kind of disaster, for that matter), an emergency fund goes a long way to preventing financial disaster as well.<\/p>\n<p>Studies show that those without emergency savings are more likely to accumulate debt. Your emergency fund acts as self-insurance, cushioning you from small disasters. If you have a cash cushion, your financial plans can\u2019t be derailed by a single unexpected event \u2014 unless it\u2019s huge.<\/p>\n<p><b>How much do you keep in your emergency fund?<\/b>&nbsp;How did you choose this amount?<\/p>\n<p><em>[photo by <a href=\"https:\/\/www.flickr.com\/photos\/goincase\/384995672\/\" target=\"_blank\" rel=\"noopener\">Incase<\/a>]<\/em><\/p>\n","protected":false},"excerpt":{"rendered":"<p>Most personal finance experts agree: The first thing you should do \u2014 after meeting basic needs \u2014 is to establish an emergency fund.<\/p>\n<p>Life is full of unexpected surprises, many of which cost money \u2014 a thief smashes the windshield of your car, your son gets sick, your water heater overflows. When people live paycheck to paycheck without any savings, they\u2019re at the mercy of these small crises. Sometimes a tiny problem becomes a huge one because the victim wasn&#8217;t prepared for possible trouble.<\/p>\n<p><a title=\"Fender Bender\" href=\"https:\/\/www.flickr.com\/photos\/goincase\/384995672\/\" data-flickr-embed=\"true\"><img decoding=\"async\" loading=\"lazy\" class=\"aligncenter green-border\" title=\"Fender Bender\" src=\"https:\/\/www.getrichslowly.org\/wp-content\/uploads\/384995672_67b1d2b1f4-3.jpg\" alt=\"Fender Bender\" width=\"640\" height=\"480\"\/><\/a><script async=\"\" src=\"\/\/embedr.flickr.com\/assets\/client-code.js\" charset=\"utf-8\"><\/script><\/p>\n<p>\n","protected":false},"author":3287,"featured_media":0,"comment_status":"open","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":[],"categories":[491],"acf":[],"_links":{"self":[{"href":"https:\/\/www.getrichslowly.org\/wp-json\/wp\/v2\/posts\/235343"}],"collection":[{"href":"https:\/\/www.getrichslowly.org\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.getrichslowly.org\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.getrichslowly.org\/wp-json\/wp\/v2\/users\/3287"}],"replies":[{"embeddable":true,"href":"https:\/\/www.getrichslowly.org\/wp-json\/wp\/v2\/comments?post=235343"}],"version-history":[{"count":0,"href":"https:\/\/www.getrichslowly.org\/wp-json\/wp\/v2\/posts\/235343\/revisions"}],"wp:attachment":[{"href":"https:\/\/www.getrichslowly.org\/wp-json\/wp\/v2\/media?parent=235343"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.getrichslowly.org\/wp-json\/wp\/v2\/categories?post=235343"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}