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Our lives are constantly changing with surprises occurring daily. Unfortunately, many of those surprises come with negative financial consequences. You can’t plan for everything, but you can create a financial buffer, an emergency fund or rainy day fund, to mitigate the risk.

What is an Emergency Fund?

An emergency fund is money that you’ve set aside for life’s surprises. This money is earmarked for emergencies like losing your job, a major repair on your house, a car wreck, having to replace a large appliance like furnace or air conditioning units, a medical event, etc.

It shouldn’t be used for discretionary spending like buying a new car, buying furniture for your house, or other planned expenses. If you have planned expenses like these, create a separate savings account for them and save money for these items separately.

Why do I need an Emergency Fund?

You need an emergency fund because you cannot predict the future.

I used to play Monopoly a good bit growing up. Nothing is more frustrating than buying hotels on a piece of property, landing on someone else’s hotels, not having enough money to pay them, and subsequently losing those same hotels in the same turn. On top of that, they sell for less than you paid for them, so you end up even further behind

The same kind of thing happens in real life. If you don’t have an emergency fund, one bad financial surprise like a job loss could cause you to start missing payments on your home or car. You may need to start selling items just to have enough cash to make it through the month. If you don’t get caught up, you could lose everything you’ve built.

An emergency fund allows you to easily make it past the small bumps in the road and gives you a little breathing room for the larger financial obstacles that get thrown in your path.

If you have 3-6 months of expenses in an emergency fund, that job loss may not be bad at all. You may be able to find a job within the first couple of months, rebuild your emergency fund, and go back on your way with little to no problems.

How Much Money Should I Have in an Emergency Fund?

The rule of thumb is you should have 3-6 months of living expenses saved up.

If you have a two-income household and you both have steady paychecks, you can probably get away with only 3 months of living expenses. If you have a one-income household and the majority or all of that income is based on commissions, you should definitely consider saving 6 months of living expenses.

Ultimately, this question comes down to your comfort level with financial risk. You know your life better than anyone else. If 6 months isn’t enough and you can spare more money in your emergency fund, by all means save more.

However, keep in mind that money you keep in your emergency fund will not be working as hard as money you keep in your investment accounts (most of the time).

How do I Start an Emergency Fund?

To start an emergency fund, you first need to know how much money you have going in and out each month and how much money you have in your accounts.

To do this, start a monthly budget that will track your income, spending, and account balances each month.

Once you do this, you’ll know how much you have left over each month for savings (if you don’t have any leftover, it’s time to figure out why and start saving money for the future).

From this amount, you can determine how much to separate into you regular savings and investment accounts, and how much to add to your emergency fund.

Where Should I Keep My Emergency Fund?

Keep your emergency fund in a liquid account (one you can get money out of the same day). The easiest accounts would be a checking or savings account that you can access immediately via a check or debit card.

Some things to consider:

Placing the emergency fund is in its own account to make it a little more difficult to access than your other accounts.

Keeping the check or debit cards somewhere you don’t normally frequent like a different part of your wallet or in a different place entirely in your house like a safe or lock box.

Keeping it at different bank, so you don’t see it every time you check your normal balances and so it’s harder to transfer funds.

When and What Should I Use the Emergency Fund for?

You’ll have expenses along the way that feel like emergencies, but really aren’t. An emergency should be something that is necessary, unplanned, and urgent.

Some examples include an insurance deductible for a car wreck or medical expense, loss of a job, an act of nature (hurricane, tornado, flood, etc.), etc.

Conclusion

An emergency fund or rainy day fund gives you ability to weather the majority of life’s unexpected events. It keeps you from taking a step back with your finances every time something unexpected happens. An emergency fund allows you to focus more on building wealth and reaching your financial goals. If you haven’t already, start saving for an emergency fund today and stop playing with financial fire.

Do you have an emergency fund?

How much do you save in your emergency fund?

Do you have any stories showcasing how you’ve used your emergency fund?

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