The emergency fund is the first step in any debt free journey.
Emergency Fund Definition: An emergency fund is an account used to set aside funds needed in the event of a personal financial dilemma, such as the loss of a job, a debilitating illness, or a major expense.
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According to financial host Dave Ramsey, the first emergency fund is a $1,000 that should be set aside for unexpected emergencies.
A larger emergency fund is when one becomes debt free except for your home. This should cover 3-6 months of expenses. So, for many people this could be between $12,000-$24,000, depending on your income.
An emergency fund prevents you from becoming desperate when an unexpected emergency happens. And they will. Getting a credit card advance or a payday loan are terrible alternatives.
How big should your emergency fund be?
The more stable your income and household are, the less you need in your emergency fund.
If you’re part of a two-income household or you’ve had a steady job for several years, then a three-month emergency fund is probably just fine.
But if you’re a one-income family, you’re self-employed, or you earn straight commission, then a six-month emergency fund is probably a better idea for you since a job loss could make you unable to pay the bills.
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Where should I keep my emergency savings?
Your emergency fund should be liquid, meaning you need to keep it in a place where you can get to it easily and quickly. (See my post on banks that still offer free accounts.)
The best option is a simple checking account or money market account that comes with a debit card or check-writing privileges. That way, you can pay that doctor or mechanic quickly and with no headaches.
But . . . make sure you’re not keeping your emergency fund in a place that’s too easy to access. You don’t want to be tempted to dip into it!
What’s an emergency?
When a sudden expense pops up, it can feel like an emergency—but that might not be true.
Here are three questions to ask yourself to determine if you need to tap into your emergency savings:
1. Is it unexpected?
2. Is it necessary?
3. Is it urgent?
How to Quickly Build an Emergency Fund
One of the easiest ways to beef up your emergency fund is to sell some stuff! Go take a look in your garage or dig through your closet—is there anything you could part with? Selling some items that are collecting dust can add up to major cash in your emergency savings. And every little bit helps! You’d be surprised at how quickly $5 here or $10 there can add up.
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It’s important to note that investments do not count towards an emergency fund. Your retirement or 401 (k) does not count. These accounts are not liquid or easily accessible (there are serious tax consequences for 401 (k) withdrawals.)
People who don’t have an emergency fund wind up being forced to take out a pay day loan or get a cash advance on a credit card. Getting access to emergency loans or emergency cash is not what I want for you.
I don’t want this to happen to any of my readers. The interest rate on a payday loan and credit card cash advance are incredibly high and will delay your ability to become debt free and invest.
An emergency fund is vital. It’s vital because emergencies happen.
People get sick, lose a job, car accidents happen, tornadoes, hurricanes, riots, fires, earthquakes all happen as well. As an adult, we prepare just in case something like this happens to us. Because they will.
- I am in my late 40’s:
- I have lost a job,
- had a health scare,
- lived in a city that experienced a major riot (Los Angeles 1995),
- and in a city that experienced a major hurricane and flood (New York 2012).
Life happens. These were all near misses that should have been wake up calls for me.
Don’t wait. At the very least, start saving for your $1,000 emergency fund today!
Having an emergency fund is an umbrella for your life. Be prepared.
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