Emergency Fund: Why You Need One

One of the greatest tools to keep people out of debt and constant financial crisis is an emergency fund.

It doesn’t matter how well you plan things in life or how much money you make, no one knows what is going to happen. A transmission goes out. The refrigerator stops cooling. A child takes an unexpected trip to the ER. Unexpected things happen from time to time, and it pays to be prepared.

According to a survey by Bankrate.com, 63% of American households do not have enough money saved to cover a $500 to $1,000 emergency expense. When one doesn’t have money set aside, it is easy to resort to a credit card to cover the expense. With the average credit card rate at 14.97%, that emergency just became more stressful and the expense more expensive.

The solution? Establish an emergency fund. Your parents or grandparents likely encouraged you to have a “rainy day” fund. They knew what they were talking about. An emergency fund puts a buffer between you and those rainy days. It turns a crisis into an inconvenience. Your emergency fund is a reserve to cover truly unexpected expenses and should only be used for true emergencies.

While having an emergency fund is smart for anyone, how much to put back depends on each family’s financial situation. The more stable your income, the less you need in an emergency fund. Most experts recommend setting aside three to six months of living expenses. For those just starting an emergency fund, that goal may seem unattainable. Start small with a goal of $1,000. This amount will cover many of your unexpected expenses or an insurance deductible. It will also allow you to sleep better at night. After you reach that goal, set another attainable savings goal and just keep saving. No matter how much you save, just having an emergency fund makes all the difference.

Keep your emergency fund in a place where you can access it easily (preferably not in a jar buried in the backyard). A good place to store these funds is in a traditional savings account or a money market account. Both are interest bearing and easily accessible. No matter where you choose to put your emergency fund, the idea is to keep it safe and separate from the rest of your resources.

Having an emergency fund can mean the difference between financial disaster and financial security.  Building an emergency fund may take some time, work, and sacrifice but it will be well worth your effort.  Feeling secure in your finances and knowing you are prepared if an unexpected crisis arises will give you peace of mind and allow you to sleep better at night. Less stress and better sleep will give you the freedom to focus on reaching all your financial goals!