Emergency Fund – Explained

Everyone should have an emergency fund or “Grandma’s rainy day fund”. It’s going to rain sometime and you need to be ready! All an emergency fund is, is money set aside to pay for unexpected expenses.

A beginner emergency fund is $500 to $1,000, depending on your household income. Household income includes your income, your spouse’s income if you are married, and any extra job income. If your total household income is less than $20,000 a year, a $500 beginner emergency fund is usually good. If your total household income is more than $20,000 a year, a $1,000 is good to start.

A beginner emergency fund is for those who are in debt. The beginner emergency fund will usually pay for unexpected expenses while you are working your way out of debt. A fully funded emergency fund is 3 to 6 months of expenses. This size of emergency fund will cover the unexpected loss of household income for a period of time. Even if you feel your paycheck is secure, bad things can (and do) happen to good people. Having a fully funded emergency fund keeps you financially afloat without going into debt.

Have you ever noticed that when you have money set aside, there don’t seem to be as many emergencies? Likewise, when you don’t have any money set aside an emergency seems to occur every other week! Having an emergency fund helps to keep emergencies from happening.

You want to keep your emergency fund somewhat easy to access but not too easy. After all, if there’s an emergency you need to get the cash. The emergency fund is not a fund to make money and it is not an investment fund. Don’t keep your emergency fund in your primary checking account, that’s too easy access. A separate savings account or a money market account are two examples of where to keep your emergency fund. You don’t want to keep your emergency fund in investments because it can take days to get your money and there’s the possibility of the investment going down. When an emergency happens, you need to be able to count on the money you set aside to pay for the emergency.

Your emergency fund is only to be used in, you guessed it, EMERGENCIES! Christmas in not an emergency! Christmas and birthdays come the same time every year and gifts should be funded throughout the year in your monthly budget. Ordering a pizza is NOT an emergency. Some examples of emergencies: the air conditioning/furnace in your home goes out, your roof is leaking, the transmission goes out on your car, losing your job, among many others.

Your emergency fund provides a financial buffer so it doesn’t turn into a financial catastrophe. Whatever you call your emergency fund, you need to be prepared for those unexpected expenses that can come out of nowhere.

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