What is an Emergency Fund Really For?

emergency fund

Please welcome back our usual Tuesday contributor, Cat from Budget Blonde.

First things first, when it comes to discussing an emergency fund, there’s bound to be some disagreement because we all have different opinions of what constitutes as an emergency. Still, I think it’s a worthy topic, so let’s jump in shall we?

Why Do Experts Recommend Emergency Funds?

What’s the deal with these things anyway? Why are we supposed to have them? Most financial experts treat them as a necessary part of any financially savvy person’s life. However, I have come across an expert or two who say that if you’re really good with your money, you don’t really need one at all (because technically, you’d make more money investing it, so if an emergency happens, you could just sell some of your shares.)

However, I have an emergency fund for one reason and one reason only: to prevent getting back into credit card debt. Being in credit card debt wasn’t fun. In fact, it was pretty soul crushing, and I didn’t even have that much of it compared to some of my savvy PF friends (I had about 6k.) So to me, having my emergency fund there means that if something bad happens, I won’t have to swipe the card and put an amount on there that I can’t afford to pay off at the end of the month.

What is an Emergency?

In my opinion, these are examples of situations that would require me to make a withdrawal from my emergency fund account:

1. Buying a new-to-me car if a car accident totaled mine.

2. A very sick husband or child who needed my help and thus caused me to bring in less income because of the time required to take care of them.

3. An unexpected home repair that was necessary for living safely in my house.

4. A last minute flight that I needed to purchase because a parent was very sick.

5. Depending on the severity of the issue, an emergency vet visit for my dog. If she was old and had cancer, I would likely not prolong her suffering, but if she ate a sock and required emergency surgery that would allow her to live several more years, I would definitely pay for it because that dog is my kid.

My emergency fund isn’t for a much needed vacation, a lifestyle upgrade, or – if I’m being honest – bailing a friend out of financial trouble. The fund is set up for serious issues that come up in my little family of 4 and us alone. I’m sure not everyone will agree with this, but that’s why personal finance is personal, after all. :-)

How Much Should You Have In An Emergency Fund?

I think the general consensus is six months of living expenses, so I should add a few thousand more to mine. If you are just starting out, $1,000-$2,000 will cover most of life’s uncomfortable expenses that tend to crop up from time to time. Then you can add to it as you are able. (Editor’s note: I would have to agree on Cat with this amount to start out with – even as little as $500 is a great place to start and should, generally speaking, be based off your specific needs. The point is to start one with the intention to build it and thus will look different for everyone else. My wife and I have eight months of mortgage payments and four months of living expenses – working towards 12 and 6 months respectively since we work for ourselves and want that amount to give us peace of mind. That said, my peace of mind is going to look different from yours and vice-versa. :-) )


What do you consider to be an emergency? Do you currently have an emergency fund?


Photo Credit: A Magill

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About the author:

Catherine Alford is a personal finance freelance writer and blogger. She received a B.A. from The College of William and Mary and an M.A. from Virginia Tech. When she is not writing for other websites on all topics frugal and fabulous, she enjoys sharing her adventures on her blog, www.BudgetBlonde.com. You can connect via Twitter / Facebook.

61 comments on “What is an Emergency Fund Really For?

  1. This is a great summary of what an emergency fund is and why you should have one. I think one of the biggest arguments against an EF are from people who are paying down high interest rate debt. I’m an advocate of even a small EF for everyone though, since you wouldn’t want to add to the debt you are trying to pay down if an emergency comes up.
    Kay recently posted..7 Smart Strategies to Help Teach Your Kids About MoneyMy Profile

  2. Before when I didn’t read on Personal Finance blogs it never came into my mind that I need an emergency fund. But after reading different PF blogs and talking about the e-fund, now I set aside for my e-funds. Now I know how important e-fund is.

  3. This is a really good question, Cat. I have an “emergency” fund, but it’s the same as my “savings” fund, so I will end up taking some money out to make a down payment on a car (if my Saturn ever dies – going on 220k miles woohoo! haha). So maybe I don’t have a “true” emergency fund but I think the important thing is that I’m regularly putting money in it, and putting money in it more often than taking it out.
    DC @ Young Adult Money recently posted..My Monthly Budget BreakdownMy Profile

  4. We keep quite a bit in our emergency fund these days because we have two rental properties and we also have two crappy cars that could die at any time. So we like to feel protected just in case a “perfect storm” of calamities were to come our way. But back in the day when our cars were not so old and we had no rental properties, we had a lot less in there. It just totally depends on your situation.
    Dee @ Color Me Frugal recently posted..Reflections on 3 Months of BloggingMy Profile

  5. We actually have an e-fund that’s separate from other savings we have for travel, car maintenance etc. I consider an emergency to be losing a job, big health issues, disability, etc. I do think there’s a point at which you don’t necessarily have to have this money in savings, but it would require you to be able to withstand a 50-60% loss in your investments and STILL have enough money for a full e-fund WITHOUT taking money out of your other goals. So you can get there, but it requires a decent amount of money.
    Matt Becker recently posted..A Step-by-Step Guide Through the Process of Actually Buying Life InsuranceMy Profile

  6. I agree with Jefferson above. Most things can be covered by that $1,000 fund when there are hiccups that come in… unless life turns into a bit of a cluster-fudge all at once. The money above that is really just for job loss or a very severe car repair I guess.

    That being said I have close to 3 months of living expenses at the moment – I don’t have the nerves to drop down to $1,000. Also, my job security is a bit questionable, so I need that extra bit on there.
    Alicia recently posted..Payroll Issues.My Profile

  7. I think it’s important to not use your emergency fund as a catch-all for expected emergencies. By expected, I mean things like a yearly car insurance payment, a car repair or a trip to the doctor to deal with a sinus infection. Those expenses may not be monthly, but they’re common enough that you can work them into your budget and set aside money for them each month.

    That way, you can keep your emergency fund for the really unexpected stuff and not chew it up with predictable expenses.
    Adam Kamerer recently posted..Need A Cheap Gym Membership? Check With Your Local UniversityMy Profile

  8. I agree with your reasons. I mostly have my emergency fund for health and auto issues that may come up. I probably have more than I need, but since my boyfriend doesn’t have as much saved up, I’m thinking about him as well. Thankfully we rent so that lessens the burden a little.
    E.M. recently posted..When Have You Paid the Price?My Profile

  9. Like DC, we have a savings account, but not anything that is strictly an “emergency fund”. This is something that I want to change this year, and you highlighted some excellent reasons why it would come in handy. I think $2500 would be a solid base for a true emergency expense, but anything to avoid falling back on credit cards is a good start!
    Lauren May recently posted..Do You Have Unclaimed Property?My Profile

  10. I’ve read the arguments for and against having the e-fund and I truly never really can get on-board with the against. It just seems like common sense to have some money that you can quickly access in the case of an emergency, even if you are in debt. Like you mentioned with wanting to stay out of credit card debt, having that little buffer could prevent worsening or restarting a debt cycle. Because I don’t have any dependents (not even a pet), I’m good with about 3 months of living expenses and then investing the rest. If I had kids, I’d probably want more money put away.
    Broke Millennial recently posted..Happy First Birthday, Broke MillennialMy Profile

  11. Great post, Cat. I’m a planner married to a compulsive saver, so between the two of us an emergency fund is an absolute must! I’m glad you included unexpected pet expenses in your roundup – several years ago, our one-year-old pup got choked out by the other one (random!) and required a few emergency vet overnight stays to the tune of $1,700. The EF came in super handy for that drama!
    Kendal @HassleFreeSaver recently posted..Money-Saving Tricks Part IIMy Profile

  12. We set ours at 1k for each family member (including the dog). So $3k. Because my husband was out of work, we also put $2k aside in case we hit the 6 months when unemployment ran out. Now that we have two incomes again, we will probably do 6 months of expenses + $1k/family member.
    Michelle recently posted..Debt Repayment ConfessionMy Profile

  13. I don’t have a large e-fund…I have a fairly stable government job so I feel more secure having money invested elsewhere. I do have money liquid, although that is because we’re saving to buy a place. There definitely is a need to have an e-fund but not necessarily a large amount. In case of a true emergency, I’d use a credit card BUT make sure to withdraw money from other accounts to pay it back before the payment is due.
    Andrew@LivingRichCheaply recently posted..Is This Still the Land of Opportunity?My Profile

  14. FIrst up, I still squeal every time I see – “family of four”! :) Well, I am definitely one of those financial advisors who believe you should have at least a portion of your emergency fund in an easy to access savings account. While I do recommend saving 3-6 months of living expenses, I cannot argue if you want to invest a portion of it as long as you don’t put it in something where you will incur any penalties for withdrawing (and I wouldn’t invest more than 1/2). The reason I’m not huge in investing ALL of it, is because an emergency is just that – an emergency. You cannot predict when it will happen. While you may have a narrow window to sell your shares at the best price, that isn’t always possible. And sometimes you just need immediate cash and want the ability to go to the bank or an ATM. I do agree that you have to figure out what’s best for you and if you’re paying off debt and savings 3 months of living expenses isn’t practical, then set aside a small amount until you reach $500, then $1000. You can continue to add slowly or add after you eliminate debt.
    Shannon @ The Heavy Purse recently posted..Improve Your Financial Health: Fix Bad Money Habits in 4 Steps and Embrace Living within Your MeansMy Profile

  15. I am definitely in the 6-8 months life expenses for an emergency fund camp. Once you get to that level, though, I don’t necessarily think it has to all be in cash, but it does have to be “easily accessible” when needed. I also agree, though, that it is not necessarily for “emergencies” only but really for living. The more you have in the fund, the more flexible and stress-free your financial life choices will be.
    Shannon @ Financially Blonde recently posted..Music Mondays – The ChampMy Profile

  16. With no kids, no pets, no home and no car, we don’t really see the point of an emergency fund. We have about 3-4 months of expenses in a savings account just as regular savings, though. The only possible emergency would be with our real estate investments. We’ve had to use everything for emergencies there before (line of credit, all cash, but not credit cards). I guess our savings is some sort of emergency funds in that sense.
    Deia @ Nomad Wallet recently posted..3 Studies Reveal Why Budgets FailMy Profile

  17. I admit to slipping up in the past and dipping into this fund when I shouldn’t have, but I also was stupid and didn’t aside other savings buckets for other things, so it left me feeling unbalanced or depleted in other areas. It’s hard but you gotta be as disciplined as possible not to touch it, especially when it grows and “times feel good” because karma will come back and bite you in the ass. :)
    Tonya@Budget and the Beach recently posted..High School Reunion Worth It?My Profile

  18. I think the amount should depend on your situation and family size. My dog never ate a sock, but did eat a hair scrunchee (back in the 90′s when people wore those) and had to have surgery. I was in college at the time and it was a blow to the finances for sure. I think the vet let me make payments, but I’m sure that would never happen today. You just never know what sort of trouble you might find yourself in to need and e-fund.

  19. With most of our insurance policies having a fairly high out-of-pocket maximum these days, I think an emergency fund is as required as ever. God help you if your treatment happens at the end of one year, and spills over into the next.

    The opportunity costs on a few thousand dollars isn’t so great that I’d be tempted to put that $5k or $10k in the market.
    Done by Forty recently posted..How We Used Mental Accounting to Pay Off Our MortgageMy Profile

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