Find Financial Safety With an Emergency Fund

Start your saving strategy with an emergency fund.

Years ago I learned a simple expression that made a sizable difference in my financial life. It was the expression “Plan for the worst, hope for the best.” My optimistic wife might say that using a phrase like this is pessimistic but I like to call it realism. Life can throw many things at us. We are unfortunately not all-knowing, and in today’s economic climate it’s easy to get caught off guard. An emergency fund is the answer to such uncertainty. The thought behind an emergency fund is the same as home insurance; both protect you from unmitigated risk in the event of an emergency.

What Exactly is an Emergency Fund?

An emergency fund is what it sounds like – a lump sum of cash that you can access in the event of an emergency, such as loss of a job or an unexpected medical issue. Now, people can debate what a true emergency is, but what we are talking about here is something along the lines of losing a significant source of income or family emergency. Personally, I can remember when my step father, who was in the military at the time, was called up to active duty, but through a chain of events ended up not going active. The result of him not going active meant that he did not get paid his salary for four months. Thanks to his and my Mom’s emergency fund, they were able to make it through that stressful time.

How Much do You Need?

Most experts say that you need at least three months if not closer to six month’s worth of living expenses saved to have an adequate emergency fund. Some are even arguing for the need for a 12 month emergency fund in light of today’s financial climate. More is better but it takes time to get to any of those milestones if you’re starting from zero. If you don’t have an emergency fund set up, now is the time to do it.

Surprisingly, many do not have such a fund to fall back on in times of emergency. A recent study shows that only 38% of Americans have an emergency fund. Living in a saving-adverse culture and a weak economy make it easy to put off starting an emergency fund. However, living a frugal life calls us to make choices that can help further us along the road of financial freedom.

Where do You Start?

The short answer is through saving. You might be thinking “I’ve just begun saving and do not have much built up”. If you’ve automated your savings, that is a great place to start. If you want to establish a basic savings account before diverting money to an emergency fund, set a goal of $500 or $1000 and then start supplying cash to your emergency fund. Calculate your necessary expenses (mortgage/rent, utilities, groceries, gas, etc.) and multiply that by three, six, nine or 12 and direct funds each month to your emergency fund account until you reach that amount.

How Should You Invest It?

Three months of living expenses is not a small amount, nor is six months for that matter so you will want these funds to work for you. Savings accounts, money market mutual funds and short term bond funds are all viable investment options. Liquidity is of utmost importance, so be wary of sacrificing it for a better return; you don’t want to find yourself in immediate need for some of the funds and not be able to access them.

The real beauty of an emergency fund is peace of mind. Yes, it does require sacrifice to establish and will not be fully funded overnight, but the reward is well worth the sacrifice.

Do you have an Emergency Fund? Why or why not?
Photo courtesy of: Robert Linder

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37 comments on “Find Financial Safety With an Emergency Fund

  1. I’ve always had some sort of emergency savings growing up because I realized early what money was all about. Over the years when I bought my first house at age 20 is when I started to really start saving. Some people suggest 3-6 months of what your expenses are but we like to keep up to a year even if it is in a TFSA. Essentially what makes you sleep better at night, and what is realistic if something major were to happen. An emergency fund all takes time and little by little it will grow. Cheers Mr.CBB
    Canadianbudgetbinder recently posted..Fall Gardening..Go Grow Something And Save!My Profile

    • That’s great you like to have a year saved Mr. CBB. I know a lot of people are starting to recommend that these days. I completely agree that you need to go with what helps you sleep better at night, and that’s different for every individual.

  2. We have an emergency fund that would cover about 1 month’s worth of expenses, but including the cash we have saved up for “targeted” savings, it would be closer to 3 months. I hope to boost our emergency fund in the near future but we’ve been focusing on saving for a down payment and paying off our student loans.
    Jason recently posted..The Rise of the Female TraderMy Profile

    • You bring up a great point Jason. When should you not put money away for an E-Fund? I think you hit two great reasons in relation to saving for a down payment and paying off debt. I know that there can be some disagreement in regards to this, but I would tend to side with paying off the debt first as long as you have some sort of small cushion in case something were to happen.

  3. Being retired, we beefed up our emergency fund. We have a full year sitting there (to replace living expenses if need be), plus some savings for other things we know are coming up – like that next car or the new roof or windows or water heater and etc.

    On a side note, I love your site design. How do you get the little boxes around your posts?
    Marie at Family Money Values recently posted..Six Reasons to Work in a Small CompanyMy Profile

    • That makes total sense Marie. I know that my Mom and Stepdad are the same way.
      Thanks for your comments on the design. The boxes are actually a part of the theme I chose. It is the Confidence theme and I found it on Theme Forest. I wanted the site to have more of a magazine feel and this fit the bill.

  4. Good explanation of why an emergency fund is important. I also like how you were sensitive to the fact that it will take a while to save up if you start from zero. Sometimes I feel personal finance writers arrogantly state that they have x amount in their emergency funds and they are set and blah blah blah. Let’s be sensitive to the fact a lot of peole don’t have one and need encouragement to start, not someone marginilizing them for their past circumstances!
    DC @ Young Adult Money recently posted..What is the Dow Jones Industrial Average (DJI)?My Profile

    • Thanks DC. I think many times as PF bloggers we can be guilty of assuming that everyone’s starting from the same place or just need to do it and get over it already. I think a big key is that the amount needed is goingto vary for each person. While I might be ok with 3-6 months, you might not be able to sleep at night with that amount so you may want 12 months. For someone just starting, it’s more important, (IMO) to encourage them to see the importance of saving and to start with small amounts if need be. In the end, we all have to start from somewhere and we won’t accomplish anything if we don’t start.

  5. If you have no savings, I’d agree to start with $500. Getting started is the hardest part and it seems like Mt. Everest if you have to same 6 mos of expenses, so start small. That being said, I like 12 mos. I think I could find a new job or maybe even a career in that amount of time. We are short right now because of our rental property, not technically an emergency expense but we decided to go for it. We’ll build it up again.
    Kim@Eyesonthedollar recently posted..What You Need and Don’t Need For New BabyMy Profile

    • I agree Kim, getting started is the most difficult part especially if you don’t have a saving mindset. I read somewhere once that if people had $500 in savings that would solve a lot of debt problems. Don’t know if I agree, but $500 is a good place to start. I understand being short due to your rental property. The nice thing is that should be able to help you build it back up.

    • I agree Joe. The furthest I go is a money market mutual fund. I think people get distracted by the terrible rates that they hate their money not earning anything, which is not really the purpose of the E-Fund anyway. I am with you on now being able to take on more risk with my investment money because you have the peace of mind of your E-Fund.

    • That can be great too Michelle. We have some set aside as well for both any big repairs, which helped when our AC went out of commission two months ago.

  6. I have an emergency fund with about 8 months worth of expenses. I keep about $1,000 in cash so I have it if I need it right away. The rest is in a short term bond fund. It’s still liquid enough to have access to within 2 days, and lets me earn a higher return so less of my money is losing out to inflation.
    MoneySmartGuides recently posted..12 Months of Goals: OctoberMy Profile

    • That’s great Don! I’ve heard that some will keep a similar amount of cash on hand just in case of emergency, so I can see the value in that. I’ve also heard of more people going into ST bond funds with their E-Fund money. It can earn more, you just have to be careful that the fund does not move against you. Thanks for stopping by!

  7. I’m still mooching off my emergency money since bf lost his job. I read something similar to what you wrote and started saving. Thank god that I did! Not sure where we would have been now… Before all of this happened I was putting away small chunks of money into a savings acc. every paycheck. If I had the automatic withdrawal option I would def. go for that as it makes it much easier to never think about that money in the first place.
    Veronica Hill recently posted..Just Do ItMy Profile

  8. While I agree with $500 or $1000, I can’t stand the idea of having six months worth of living expenses just sitting there and bringing me no interest, or not being invested. I chose short term investments, like CDs, so if I hit a very rough patch, I know I can free the money by “date the CD will expire”. At least I earn something!
    Pauline recently posted..Snowflaking my way through SeptemberMy Profile

  9. I can understand that feeling Pauline. The thing is that the two things, the E-Fund and investment money, are completely different. The real purpose of the E-Fund is not there to be thought of as an investment, it’s for emergencies. So, people can run into trouble by investing the money in something and losing it. You want something safe that’s there in the case life throws you something major. The rate you’re earning on it should not matter as you’ll be investing other money to achieve a greater return as that is your money to invest.
    In the end, the important thing is that you’re saving money and that you can get to it in the event of an emergency.

  10. I hear you MMD. It can be easy to let the funds go to other things. It’s been a temptation I’ve run into in the past. I don’t think there has to be a fixed amount that you have to have, peace of mind is what it really comes down to.

    • I totally agree Jefferson, they can be a lifesaver. I can remember numeroues times as I was climbing out from debt that mine made things much less stressful knowing I had something to fall back on.

  11. When I read the book “your money or your life”, I came to know the importance of an emergency fund for our future.
    Since than me and my husband has been planning to build our emergency fund that can cover our living costs atleast for 2 years.
    It’s essential for every family to have an emergency fund especially if you have other family members that depend on you.
    Parvinder@Readtoawake recently posted..11 Personal Finance Tips Your Teacher Never Taught YouMy Profile

    • Wow, to years. That’s awesome. I can’t imagine trying to build an E-Fund that covers two years, but in the end it comes down to peace of mind. I totally agree that it’s essential if you have others depending on you.

  12. I am glad you said it sir. :) You and I are along the same thinking on this. I’ve had, or seen, too many things in life not to have a contingency plan.

  13. I struggle with this, it’s something I’m working on. We simply have too much debt to tie up 3 months worth of salary in a savings account but I would sleep well at night knowing we had $1000 set aside for an emergency. We just started our savings last month and have $40 so far, have to start somewhere right?! Our jobs are secure and God forbid we needed to, in Canada we have employment insurance should we lose our job to tie us over…but me especially there’s no reason why I would ever need to claim EI in my field, unless accident related (which my millions in malpractice and liability insurance would cover) I could have another job quite quickly.
    Catherine recently posted..Ok, I’m JoiningMy Profile

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