A few years ago, our van needed four new tires to pass inspection. In the same week, I woke up one morning to an icy cold shower and the discovery that our hot water heater was broken beyond repair.
The total cost of the replacements was $1000.
Have you had weeks like that? Where everything seems to go wrong at once and the cost is way more than you expected.
How would you pay for those expenses? Do you have enough cash to cover them or would you have to rely on high interest credit cards or a loan from family?
According to a recent survey, over half of Americans have less than $1000 in their savings and checking accounts. With little money in their bank accounts, these Americans couldn’t afford these unfortunate expenses without using a credit card or maybe relying on a loan from family and friends.
We could have easily grabbed our credit card during that miserable week, but thankfully, my husband and I had the cash. You see, we learned a valuable lesson many years prior about the importance of an emergency fund.
A Very Tough Year
We have lived through some challenging months as small business owners, but 2007 was a very tough year for us. We had a toddler and a baby on the way and our business was struggling. Every month, the business income must cover our business and household expenses, but many months during that year, our income barely covered the business expenses, leaving very little for our household.
I remember one morning my husband and I were sitting at the kitchen table contemplating if we should sell one of our cars. It was a very scary time and I wouldn’t wish that on anyone.
Our saving grace was the money we had saved in our emergency account. If not for that fund, we would most likely have used credit cards to survive. We reduced our spending where we could that year, but the money to pay any shortfall each month came from our emergency fund.
That emergency fund saved our business, our sanity, and our marriage.
By the end of 2007, our business picked up again–thankfully–but not before we practically wiped out our savings with only $2000 left to spare, not enough to get us through one more month.
What is an Emergency Fund?
An emergency fund is a safety net. When an emergency happens, you use the cash in the fund, instead of your credit card.
An emergency fund is NOT a spending account. Instead, it is for life’s emergencies and unexpected expenses.
Please don’t confuse this money with vacation money or new furniture money. Your wants and dreams are secondary and should be saved for separately.
Unemployment and reduced income are considered emergencies, and so is a leaking roof, a broken hot water heater, or a dead car battery, but a broken TV, sweet riding boots, or the snazziest new gadget…not so much.
Where Should the Money Go?
Create a separate savings account and call it your Emergency Fund. Be diligent about how you use this account. It might be best to use an account that isn’t linked to an ATM card, thus making it somewhat annoying to reach the funds, but not difficult when you do actually need them.
We use an online account, like Capital One 360, that is connected to our local bank. When we need the funds, it takes up to 3 business days to transfer to our checking account, eliminating any impulsive uses for non-emergencies.
How Much Do I Need in an Emergency Fund?
As you know, I am a huge follower of Dave Ramsey and his books, The Total Money Makeover and Financial Peace provided the blueprint for our Our Debt Freedom Plan.
His first Baby Step is to pull together a $1000 for a starter emergency fund. Later in his plan, he recommends saving 3-6 months of expenses, but only after paying off the non-mortgage debt.
My husband and I see things slightly different based on our personal situation, especially the one I described above. We would not have survived with just $1000 starter fund back in 2007. We are self-employed and I think even Dave Ramsey would agree that $1000 is not a high enough number for a self-employed family.
If you have a stable job, maybe $1000 is a good number to start. Although, as noted above, $1000 is easy to blow through with emergencies, so consider a starter fund of $2000-3000. Only you can determine where you need to start.
Once your finances are in order, your goal should be to increase that number to an amount that you feel is sufficient. Three to six months living expenses is highly recommended by personal finance experts, but in today’s environment, maybe six months to a year is more prudent. Back in 2007, we used about 6 months worth of living expenses and our savings came very close to drying up, so saving one year’s worth of living expenses would be more wise for us.
Where Do I Find the Money for my Emergency Fund?
I’m glad you asked! Stay tuned for next week’s post:
If you do not have enough set aside for emergencies, I encourage you to start an emergency fund TODAY. It will set you up for financial success.
Do you have an emergency fund? Are you saving for your emergency fund? What questions do you have? Let us know in the comments.
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