An emergency fund is one of the best personal finance tools to have in your money toolbox.
Emergency funds are vital to a healthy money life.
The importance of having money set aside for a possible emergency, large or small, cannot be overestimated. Our current global pandemic has made that abundantly clear.
Not everyone can consider adding to (or starting) a dedicated emergency fund; unemployment is at an all-time high for this century. But, there are many people, in various situations, who can get creative during this uncommon time. Perhaps you are one of them?
This article will help you understand more about emergency funds, and offer simple ways to increase your emergency fund, for people in a wide variety of circumstances.
What is truly an emergency?
The second rule of You Need a Budget (budgeting software with an app) is “Embrace your True Expenses.”
Learning the extent of your true expenses is key because it helps you discern between things are true emergencies and things that are not. The latter category falls into two categories:
- First, regularly recurring expenses that do not happen every month. Things like semi-yearly auto insurance payments, summer travel, and Christmas gifts fall under this category. You know they are happening, but it is easy to forget about them while budgeting.
- Second, unexpected but common expenses that are just a fact of life: auto repairs, home repairs such as a new water heater, roof leak, etc. You do not know when those things will happen, but they will happen from time to time. Having money set aside for them is good practice.
Setting those aside, then, what are true emergencies? This would be job loss, an unforeseen medical expense, etc. You would need money for those, and (as in the case of a job loss) perhaps for some time.
How much should you have in an emergency fund?
The bare minimum to shoot for in an emergency fund is $1,000. After that, most personal finance experts recommend three to six months of income or expenses, The money should be held in a liquid (i.e. easily accessible account like an online savings account).
The coronavirus pandemic has prompted many money professionals to recommend a higher amount in emergency fund use, from one year’s worth of expenses and up.
Dr. Jim Dahle of the White Coat Investor, confirms much of this by describing how a large amount of money kept in safe, cash-equivilant investments has helped him meet big expenses during this crisis.
“It’s not complicated to set up an emergency fund,” Dahle writes, “but when you need it, nothing else will really do.”
A large amount in cash can seem foolish at a time when the stock market is doing well, or when real estate prices are “hot” in your area and you’ve considered investing in rental real estate.
Based on different situations, here are some ideas on how to shore up your emergency fund, or start one if you have not yet.
*if you are a student or still living at home:
Students or other dependent kids do not technically have need of an emergency fund, but what better time to start one for any future need?
- set up an emergency fund. I actually recommend two or more higher-interest savings accounts–one for emergencies, and one (or more) for a savings goal, such as a downpayment on a house; travel. Here’s where I explain how to do that.
- once your emergency fund has $1,000, considering adding to it until you have closer to $2,000. When you start out on your own, you’ll have a great head start.
*if you are paying off student loans:
- take advantage of the forbearance of paying your student loans between now and September 30, 2020. (here’s a helpful article to explain how to determine if you do have a federal loan, when to pay, and what to do if you have a private lender loans).
- divert the money you would send to your student loans to your emergency fund. There is really no downside to setting aside all of your monthly payments through September into your emergency fund.
*if you are unemployed or otherwise in difficult financial situations:
- as soon as possible, apply for unemployment benefits. Read this article for helpful details about filing in these days.
- In addition to the federal increases, many states have made benefits more generous. Be sure to check with your state on potential additional funds. (And do not feel guilty about filing for it—you and/or your employer have paid into the system, and if you are eligible it, do it.)
- because of these more generous benefits, if you are at all able, add some of this into your emergency fund.
- if you do have extra time during a period of unemployment, set aside some time to get a sense of your money situation. As a start, perhaps calculate out your net worth?
- many of us are spending less money on discretionary items like travel, eating out, or shopping. Take this opportunity to funnel as much as you can into an emergency fund.
*if you are employed:
- if you do not have a dedicated emergency fund yet, now is the time. Open a savings account with a higher interest rate than the typical next-to-nothing. (money funds post). Get $1,000 in that account as quickly as possible, and then increase on a regulard schedule.
- chances are you are spending less money on “extras” like travel, eating out, and shopping. (Though, doubtless, your grocery spending has gone up). Take this opportunity to funnel some of that money into the emergency fund, perhaps weekly.
- check your recurring subscriptions. Are there any you can put on hold or cancel because you are not using them? (such as a gym membership). Before you can use the money for anything else, set up an recurring automatic payment of that amount into your emergency fund.
- if you do have an emergency fund, have a talk with your significant other about how large you would like it to be. Maybe a year’s worth of your basic expenses? Can you figure out how much that would be? Consider how you will celebrate the milestone once you do have that much in an emergency fund.
*if you are close to retirement, and do not have a generous emergency fund in place:
- explore the benefits of having a lower cost of living. Can you downsize your home? Your auto situation? (maybe going from two cars to one). Beginning those discussions.
- a quick way to accumulate some cash that is not very easily accessible, but still useful: stop re-investing dividends in your retirement accounts (or other brokerage account).
- Here’s how to do this– set your index funds, mutual funds, or other stocks or bonds, to not re-invest dividends. This will allow cash to “pile up.” Even if they are in retirement accounts, having that cash there can be a good thing for the first few years of retirement, so you do not have to sell stocks at reduced prices.
- if you are pre-paying your mortgage because you want it to be gone before retirement, consider scaling back on that and putting that money specifically towards the emergency fund.
Do you have any other ideas of how people can increase their emergency funds?
