Shit happens in life, you need money saved to pay for these expenses. The picture above is our dog after receiving an unexpected surgery (she’s ok). Paid for courteous of my emergency fund.
Why do you need an emergency fund?
- Half of Americans couldn’t cover a $400 emergency expense without borrowing money or selling something. — Federal Reserve Report
- Half of households have less than one month’s worth of income in a readily available savings account.– Federal Reserve Report
- 30% have zero balance in their savings account and 62% have less than $1,000 in savings. — GO Banking Rates (breakdown below).
What is an emergency fund?
An emergency fund will be three to six months (preferably nine, but work your way up) of living expenses put in a savings account. Emergencies could include losing your job, having a medical emergency, or car breaks down.
A smaller emergency fund (> $1,000 or one month of expenses) is acceptable if you are paying off high interest credit card debt. There is no “correct” amount when it comes to your rainy day fund. I think of it as the “oh shit” fund, what if you are suddenly unemployed and had no income?
Why does this need to be in a savings account and not a retirement account or 401k?
If this money was tied up in investments you might have to liquidate at the wrong time. You might also have to worry about additional taxes. By putting the emergency fund in a checking or savings account you’ll be able to access at anytime and use as needed.
Start saving for this as soon as you can, try to save 5-15% of your paycheck initially. Increase that amount as you earn bonuses or commissions.
Emergencies could include:
- Hospital bills
- Home Damage
- Job loss
- Auto accidents/repairs
- Emergency travel
- Vet bills (poor Munchie w/the cone of shame)
Once you have a secure emergency fund of at least six months continue to increase when you make a large purchase such as a house, car or incur new life changes such as pets or children. Don’t start trying to be Jim Cramer and picking stocks or becoming an active investor until you have an emergency fund established!