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What is an Emergency Fund Really For?

emergency fund

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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Catherine Alford is a professional public speaker and freelance writer who covers family, finance, and freedom. Check out her blog, BudgetBlonde, and her bio at CatherineAlford.com.

61 Comments

  • Love this, Cat, and I totally agree about the uses, etc. Basically, an e-fund should be used for a *necessary* purchase that is aligned with a real-life emergency. A vacation, a new couch – not real life emergencies.

  • Kay says:

    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.

  • Marie @ 4HWD says:

    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.

  • 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.

  • Our emergency fund fluctuates and we recently spent down a bunch of it. It is still at a healthy level though. We tend to use it for things we didn’t plan for, like when the furnace goes out or when we recently had to have a bunch of plumbing work done.

  • $1000 is the Efund value I’m aiming at. Above that, it won’t be a specific efund, it will be funds that are easily available, but are in places that can grow faster than a traditional savings account.

  • I really think there are two kinds of emergency funds… The first for life’s little emergencies.. The second for a major medical situation or a job layoff.. Everyone should have the first, even if they are trying to pay off debt.. The second is something that you need to build up over time, but it IS important.

  • My emergency fund sustains me through periods of unemployment when unemployment income and side hustle income aren’t enough.

  • 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.

  • Mark Ross says:

    As a student, I don’t have many reasons why I must have an emergency fund of my own, but I’m still trying to build my own. The only reason why I do that is because I want to be prepared for any expenses that would require a huge amount of money to be spend. I also don’t like to get into debt just to cover my emergency needs.

  • Matt Becker says:

    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.

  • Alicia says:

    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.

  • Adam Kamerer says:

    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.

  • Emergency funds are very important. I would, however, be cautious about investing your emergency fund in the stock market. Think of it as an insurance that will help you out of tight spots. If you got laid off in 2008 and then had to tap into your emergency fund you would’ve been pulling your hair out.

  • E.M. says:

    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.

  • I have an emergency fund to cover unexpected home repairs. I think it’s critical for homeowners to have one. When I was not a homeowner I always had one too. Right now, I have small fund to cover other areas but I’m trying to pay down debt so this strategy is working for me at the moment.

  • Lauren May says:

    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!

  • 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.

    • Yes I probably need to beef mine up, although I am happy with the 3k that’s in there. The kids have their own savings fund for all their expenses that will be coming up but I do need to add to it…once I get the money of course haha.

  • Anything that is unexpected is considered an emergency in our household budget. I have an efund and I like the cash to be fluid. I have over 6 months worth of expenses in there and that is where I like it.

  • 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!

  • Michelle says:

    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.

  • 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.

  • 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.

  • 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.

  • The EF for me is about giving me peace of mind. It’s great to have something to catch you if you have a misstep in life. At this point in my life, it’s pretty small, but I know it will only get bigger after a few years.

  • 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.

  • Great post. I currently have an emergency fund that I have just in case something happens to keep my peace of mind. I haven’t had to use it yet. I keep it at $2,500 right now but I’d like to grow it to $5,000 to feel really secure.

  • My emergency fund is only about three months of living expenses. Keeping any more than that in cash seems foolish with interest rates being so low. If I ever needed more than that, I would use one of my credit cards to give me a 30 day buffer (and my rewards!) I could always sell some index funds if I got desperate.

  • 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. :)

  • 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.

  • 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.

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