An emergency fund is like a safety net, providing peace of mind during unforeseen circumstances. This money needs to be liquid and accessible in case an expense arises out of the blue. There are many names that an emergency fund can go by, some of which are the following: rainy day fund, savings account, contingency plan, stockpile of cash, stash, or cash reserves, but they all serve the same purpose: to provide relief in the event of a job loss, pay cut or significant unexpected expense.
How Much Should I Set Aside in My Emergency Fund?
Dave Ramsey and Ramsey Solutions suggest that you set aside at least 3-6 months of expenses once you no longer have any consumer debt (student loans, car payments, credit cards, etc.). As a general rule of thumb, save three (3) months of expenses if you are single with no dependents and a stable income or married and each of you has a steady income. You’ll want to save six (6) months of expenses if you’re married with a single income, you’re a single parent, you have a seasonal job, you or someone in your home has a chronic illness, or if you or your spouse are self-employed, works on commission or has a highly irregular income.
Where Should I Put My Emergency Fund?
There are many places where you can put your emergency fund: a savings account, a high-yield savings account, an online bank, or a money market fund, to name a few. The most common mistake that people make is commingling their money. An example would be someone putting their “emergency fund” money in their checking account. This provides easy access to the “emergency fund,” which most people don’t have the discipline to let sit there without spending it. Not to mention that a checking account is a terrible place to put your emergency fund due to no interest being earned.
Did you know the Charles Schwab money market currently pays a 5.21% annualized interest rate? That’s right! Over the last ten years or so, if your money was in a savings, high-yield, or money market account, you were probably getting 0.1% or something to that effect. At this moment in time, with inflation sitting around 3.3%, your money can actually outpace inflation if you do your homework and put your money to work for you. Talk to a SmartVestor Pro today to get into Schwab’s money market.
When To Use My Emergency Fund
The first question I ask myself when I am tempted to use my emergency fund is, “Do I really need this?” or “Is this a true emergency?” I don’t want to get into the conversation of “needs” versus “wants,” but there is a very distinct difference between the two, and it is necessary for you to know the difference.
The second question I ask myself is, “Can I pay for this expense by adjusting my budget?” Maybe a little delayed gratification can prevent you from spending your emergency fund. You might have to sacrifice your “fun” or “fast food” money for the month to fix your vehicle.
From the Ramsey article referenced above, here are three questions that you should ask yourself if your budget can’t cover an emergency:
1. Is it unexpected?
2. Is it necessary?
3. Is it urgent?
If the answer to all three of these questions is a resounding “YES,” then you can give yourself permission to use the emergency fund. Just don’t forget to rebuild it.
Creating an Emergency Fund
A monthly budget is a time-proven tool to help you build an emergency fund. It outlines your necessary monthly payments and gives you goals to stay under in areas with potential overspending. We suggest using a zero-based budget template, so you know where each dollar of your monthly income goes and how it is being spent, saved, or planned for.
If you are unfamiliar with budgeting or emergency funds, we have a financial coach on the team who can help create and tailor a budget to help fit your specific needs and lifestyle while keeping you accountable along the way.