If you don’t know, now you know. You need an emergency savings fund. What’s that, you might ask? According to Investopedia, an emergency savings fund is “a financial safety net for future mishaps and/or unexpected expenses.” It’s an account you can easily fund, access, and take money out of in case of emergencies. I want to drive home the fact that you need an emergency fund, not only because it’s good to “save for a rainy day,” but because it will give you so much ease and less stress financially. I’ve had an emergency fund for a while, and I feel better about my financial situation because of it. So let’s dive into the why, how, and some common questions you might have about it. Plus, as always, resources!
Why do I need an emergency savings fund?
Given the current state of affairs, I think everyone understands now that life can be unpredictable. Sometimes our lives are shaken up a bit by something like your car breaking down. Sometimes, though, more significant issues rattle us like – ahem – a national emergency that disrupts our economy. In both situations, we are affected by something outside of our control. That can feel scary, debilitating, inconvenient, and frustrating. However, when we set up a fund for these moments, we can cushion our fall.
When your car breaks down, getting it fixed feels a lot less stressful when you have a spare $1,000 to $2,000 lying around. Suddenly losing a job or a stream of income like many people did last year demands that you have a backup plan. Having an emergency fund with enough to sustain you for a few months helps you stay on top of your bills and holds you over until you have a stable income stream again. In short, having an emergency savings fund gives you peace of mind in knowing that if something goes south, you’ll have the money to help you rebuild. And funding your emergency savings doesn’t have to be stressful or complicated at all! See below for more info on this.
Can’t I just use a credit card if I ever get in a bind?
You can, but I wouldn’t recommend it for two important reasons. For one, borrowing large sums of money on your credit card that you’re not able to pay off within a reasonable time is dangerous for your credit. That stress is the last thing you need when you’re navigating an emergency. Suppose you do decide to use your credit card for emergencies. In that case, I suggest still having an emergency savings fund so you can use that to pay off the balance of how much the emergency costs. If your car needs to be repaired ASAP for $1,000 and you use your credit card, paying that off is much easier when you already have an emergency fund.
Secondly, suppose you already have a lot of credit card debt or other debts that you’re paying down. In that case, it’s probably wise to steer clear of adding to your outstanding balance. So, in short, if you have to or prefer to, use your credit card to cover your emergencies but have an emergency savings fund to actually pay for emergencies. Because, remember, credit is borrowing money. You still have to pay it back.
What are the benefits to having an emergency savings fund?
I’m glad you asked! Here’s a list of a few benefits I personally have experienced from having an emergency savings fund:
- An emergency savings fund gives you security in knowing that no matter what happens (personally or nationally), you have a cushion of cash to lean on and support you. Emergencies are stressful already – we don’t need extra financial stress on top of that.
- If an emergency does come up that you need money for, you don’t have to dip into your regular savings or checking account to fund it. Your usual flow of income and purchases can go relatively untouched while the situation is financially taken care of. A plumbing issue, for example, shouldn’t be the end of the world for your wallet.
- Having this fund is one of the foundations of financial independence! With this, you can take care of yourself and your needs without owing anyone anything (including credit card companies).
How should I start and/or fund it?
For starters, start your fund in a separate account away from your checking or regular savings, so it doesn’t get mixed up with the money you’re regularly using. You can set up this account with your current bank or another bank of your choosing. You can even set up one with an online bank – just make sure the money is easily accessible to you. Second, set up automatic deposits! This is something I recommended in one of my previous Money Monday posts. Setting up an automatic deposit between $10 to $50 a month is a small but great start that makes saving easier. Thirdly, set up a goal for yourself. Most people don’t have at least $1,000 available to them for emergencies. You can use that as your starting point, or calculate how much you would need in the event of an emergency and start saving towards that number. Lastly, make sure to use this fund for emergencies only!
Funding your emergency savings account will go hand in hand with your budget – how much do you have to save each month? Can you cut back on anything to help fund this? For example, I realized I wasn’t using my Audible subscription as much these days. I spend $14.95 per month on that subscription. Now, of course, cutting out that subscription is not going to give me a considerable surplus of money for my emergency savings fund. However, it does give me at least $179.40 per year to put towards this fund without doing anything different. Now I can automate saving $14.95 each month (the same price as the subscription I don’t use anymore) to my emergency savings account. Yay!
You can try this with categories you spend a lot in, like eating out, buying clothes, etc. The good news is that you don’t have to cut these things out of your life forever or even for the whole year. Try going a month without your subscription or takeout and put that money towards your fund instead. See how you feel, and see if you even need or want to have that spending habit anymore.
More resources for you to learn about emergency savings funds:
I hope you give your current and future self more ease and financial freedom by setting up an emergency savings fund this week. Catch you soon with another Money Monday post!