Why You Need An Emergency Fund

Happy Monday, everyone! Are you enjoying these posts or getting a little tired of me talking about money? Well, either way, just a week and a half left and I will go back to talking about my boring ol’ life here in North Carolina. :) But for now — get excited you guys. This week we’re talking about SAVINGS!

:: Imaginary confetti falls from your ceiling onto your computer ::

Isn’t this way more exciting than last week’s borrrring (but oh-so-necessary) topic on debt? ;) I love saving. I’m a saving nerd.  I literally am giddy every month when I update my excel spreadsheet and see the numbers rising.

The first thing you should save for are emergencies. In life, the only thing you can expect is the unexpected happening, and that’s where the emergency fund comes into place. Here are a few common questions people have about the emergency fund:

Why should you have an emergency fund?

Your emergency fund will reduce so much stress in your life! It protects yourself in case of a job loss and creates a cushion for your household and auto repairs. If you are married, I truly believe you’ll have a happier marriage with an emergency fund in place. It’s also funny how when you have a lot of money saved for emergency fund, suddenly these unexpected events become less and less “emergencies” and are easier to face.

What’s the ideal amount for an emergency fund?

Most personal finance experts recommend 3 to 6 months of living expenses. That means if you need $2,000 a month to cover your basic needs like rent/mortgage, utilities, gas, food, then you would need $6,000 to $12,000 saved.

Where should you save your emergency fund?

I recommend investing your emergency fund in a money market account at your bank or credit union. This is normally an account with a higher minimum balance and the highest interest rate before reaching CDs.

Aren’t I losing money saving in a bank account rather than investing in stocks, bonds or mutual funds?

Yes, you may get a bigger interest return on investing the money elsewhere (i.e., the interest rate in a money market is smaller than a mutual fund), but you should think of the emergency fund like insurance. You have to pay a little out of pocket up front to protect you in the long run in case something happened. You will want your money in an account you access easily because you never know when emergencies will happen and it can take a while sometimes to liquid (or take money out easily) with a bigger investment account.

What warrants an “emergency”?

Anything that warrants a need that you haven’t planned for. Things like car or home repairs, medical expenses, damage to your property, etc.

What other questions do you have about the emergency fund? Do you enjoy saving or think of it as painful as going to the dentist? :)

This is #22 of a 31-day series on Financial Freedom. Click here to see all of the posts in the series.

(photo credit)

  • I definitely think it’s worth it to have an EF. The best reason for me is to ease my mind.

  • Yes, an emergency fund does wonders for putting your mind at ease!