Can you ever have too many blog posts talking about emergency funds? Personally, I think so but others might disagree. The “blog post talking about an emergency fund” has been done over and over again in the personal finance world. And this post is about to be another one 🙂
When I first started reading personal finance blogs, I was a soon to be university grad who didn’t have a lot of money in savings. I read countless times about the importance of an emergency fund and why everyone needs one. It helps in case of unexpected expenses! Job loss! Your car breaking down! You need it!
I liken the experience of it to that of being told to eat my vegetables growing up. It should be something that happens but I still don’t listen to it all that often. I mean, you have to actually set aside money for some hypothetical event. When you have things constantly eyeing for your attention at the current moment, saving money for future emergencies can fall through the cracks.
However, I’ve always known of emergency funds. Even as a money newb who first started reading personal finance blogs, the concept of money set aside for emergencies was never foreign to me. I don’t think it’s foreign for most other people either.
Even as a money newb who first started reading personal finance blogs, the concept of an emergency fund was never foreign to me. I don’t think it’s foreign for most other people either.
People know unexpected expenses pop up. They know they should have money set aside for an emergency. The problem lies in people’s perception of an emergency fund. Many people don’t fully know how an emergency fund works (problem one) and they usually underestimate the amount they need in one (problem two).
For the longest time, I thought an “emergency fund” was the small amount I had in my savings account. I also thought it was the leftover “buffer” amount I had in my checking account after I paid all of my bills. Most people think of emergency funds along this same line.
Having this way of thinking led me to dip into my savings account for not so critical reasons. I would take money out when I really wanted to buy some nice, but unnecessary, thing or when I would go on a vacation and need money for it.
Constantly seeing the money sitting in my bank account made me feel okay to spend it. Everything about my way of thinking of emergency funds was misguided.
An emergency fund is a dedicated account used only for real emergencies, like a job loss, medical bills, car repairs, and so forth. It’s not for when you really want to buy new clothes. It’s not the money that’s left over in your bank account after you pay your bills. That’s a buffer, not an emergency fund.
For the best chance of growing and keeping an emergency fund intact, people would be better off putting the money in a savings account at a bank different from where they do their day-to-day banking. Doing this helps when you’re someone who isn’t a natural saver.
Online banks come to the rescue with this. They’re best when it comes to holding an emergency fund. Ally Bank’s 1.00% APY for accounts blows past the traditional average 0.06% APY.
How much to keep in an emergency fund? There’s two common rule of thumbs: $1,000 in a starter emergency fund, then leveling up to 3-6 months of expenses stashed away.
Do what makes you feel most comfortable. From my senior year of high school all the way to after graduating university, I had the same old Ford Focus that I had bought on my own. Fully paying for my car at age 17 felt awesome but having to go through car repairs every year because the car was old was not so awesome.
My car situation and job situation were the two biggest things that influenced my emergency fund. It’s why I kept way more than $1,000 in an emergency fund while I was paying off my student loans.
Two big reasons I want to keep a good sized emergency fund now is because, one, I will be moving back to the states in the next year. That’s gonna entail moving around and getting a new job, a.k.a major money vacuums.
The second reason is because of an experience I’ve long fantasized about since I was a kid: buying a car with cash. I got a taste of this when I bought my first car at 17 and paid for it in full on my own. The current car I use, a Smart Fortwo, is completely off.
So, for the next few years, I won’t be buying a car with cash, but it’s still on my list. Walking into the dealership, they ask me how I’m going to finance the vehicle, I put on sunglasses and gaze into the distance and say “I’ll pay with cash.” Then they’ll look in shock as I put down the cash or write a check (<–do people still use those?).
I’ve been watching too many movies, but yeah, that’s kinda how I see it playing out.
Overall, I keep a good sized amount in my emergency fund because I’m aware of my own situation, spending habits, and priorities.
How much do you keep in an emergency fund?