April 7

You DEFINITELY need an Emergency Fund. Here’s Why?

Budgeting, Savings

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To have an emergency fund or not to have an emergency fund?  That is the question.

With many people living paycheck to paycheck, it is understandable that many skip out on having an emergency fund altogether.  I mean, if you are struggling just to make ends meet, you are probably not paying off your debts let alone stashing extra cash away for emergencies. 

You may be thinking, I’ve been fine without one so far.  Do I really need an emergency fund?  Well, yes.  Yes, you do.  And here’s why:

  • It gives you peace of mind.  
  • Can cover the cost of unexpected expenses.
  • Can cover your living expenses if you suddenly lose your job.
  • It saves you from getting into more debt.
  • It protects you from taking money out of your retirement or other savings accounts.
  • It assures that you don’t have to sell investments during unfavorable market conditions.

No one can predict the future and you don’t want to be caught up the creek without that proverbial paddle.  So, it's best to prepare ahead of time.  

Let's take a closer look at why some people are against emergency funds, how much you would need in yours, and where you should keep it.

What Exactly is an Emergency Fund?

An emergency fund is your safety net when ish hit the fan.  Think of it this way if you accidentally walk off the side of a cliff, your gonna wanna have a parachute. Well, that's what an emergency fund is.  It’s there to save you imminent disaster.  

Without it, you may be forced to take out more debt and risk derailing your financial goals or even worse, you may end up homeless.  Your emergency fund can be your superman.  There for you when you need him the most.

With So Many Reasons For Having an Emergency Fund, Why are Some People Against It? 

A popular reason for this line of thought is that by having your money just sitting in a savings account your are losing out on the opportunity to make your money grow and what’s more, because of inflation, you are most likely losing money every year.

While this is true, there is a way to get around this.  We will talk more about later on. And I’ll share with you a possible strategy for dealing with this. Here are some other reasons why people don’t believe in having one:

  • They have enough passive income to cover expenses in the case of job loss
  • They are a two-income household.
  • They prefer to use Home Equity Loans (HELOCs) for emergencies.

Every situation is different however and while this may work for some, I’d wager most of us aren’t quite so lucky to have that kind of passive income rolling in and many of us are single (or wait, is that just me?)  

Furthermore, I would think twice before using a HELOC to cover emergencies as this entails getting into more debt and paying more in interest especially when you could’ve just saved the money in the first place.

How Much Do I Need?

Most financial experts say that you should have stowed away, 3 months or 6 months worth of expenses while others recommend 8 months or occasionally up to a year’s worth of expenses.  

So which is it? Like most things in life, the amount varies depending on your individual situation.

Someone who is very specialized and in a very stable career may not need to save as much as the Joe Schmoe who works the registers at Wal-Mart. It all just depends and you’re going to have to do some thinking and calculating to figure out just how much you need.

First, you need to start off by calculating just how much your bare minimum necessary expenses are.  And by this I mean, food, shelter, health insurance, and transportation (optional).

In a true emergency situation, i.e. you loose your job, these are the things that are going to keep you alive.  

You should not be including extra lifestyle expenses such as your Netflix subscription, movie nights, eating out, or ‘a sista needs a new pair of shoes’ kinds of things. 

After calculating this, simply multiply by the number of months you think you’ll need and voila! You have your emergency fund goal.   To determine how long you should plan for think about the length of time it will take you to get another job based on your skills and your location.  

Naturally, you won’t know for sure how long it’ll take you so just do the best you can to guesstimate. Then start saving! One penny at a time!

“It’s better to plan for the unexpected rather than being taken to the cleaners when you thought you were going to the zoo.”

Where Should I Keep My Emergency Fund?

You should put your emergency fund cash in a high-yield savings or checking account as this will earn you a lot more in interest than a regular savings account.  

Most of these are run by online banks only.  Here are some of the top banks from word on the street: CiT Bank, Marcus by Goldman Sachs, and ufb Direct.  

While these are high-yield savings accounts, they are still lower than the rate of inflation so your money will lose its value over time.

If not there, then try a money market account. They may offer slightly higher interest rates and still provide you with easy access to your money when you need it. Sadly this will still cause you to lose money to inflation every year.

To combat this, you could keep, at most, half of your emergency funds in a high yield account and put the rest in a Roth IRA.  

This will allow you to have the stability of the high yield savings account with the growth of the stock market and on average should produce returns greater than inflation.  

The catch is with a Roth you can only withdraw your contributions without penalty after 5 years (yikes! a pretty long wait time if you need the money now) and even then it may need to be for qualified expenses such as medical bills, child birth/adoption, or a down payment on a house.

I don’t recommend putting your emergency fund in a CD account as these have penalties for early withdrawals. You could do a CD ladder but that just makes things more complicated and ain’t nobody got time for that!

What an Emergency Funds is not.

People often make the mistake of dipping into their emergency funds for things that they shouldn't.  An emergency fund should be reserved for emergencies only. It’s for things that are major and unexpected.  

It is not for house repairs, medical check-ups, or Fluffy’s trips to Camp Bow Wow.  These are things that you should be budgeting for already.

All in All

I definitely recommend that everyone start an emergency fund now.  There will never be a good time to start one so just do it. Even if all you have so far is a dollar. 

People who are in sales definitely need one as some seasons are very profitable and others not so much. So having something to bridge that gap can be a lifesaver. In addition, people who are the sole providers of their household and people who are trying to pay off debt, should kick their emergency fund savings into high gear. You don’t want to be living off corn and rice when times get hard. Trust me I’ve been there!

Now that you've got your emergency fund squared away, it's time to pay off that debt!  I recommend: How to Become Debt Free Without a Budget and 6 Ways to Pay Off Debt Faster.

*DISCLAIMER: The Information provided in this post is simply the opinions of the blogger and is given in the spirit of educational fun. It is not investment advice. Please do your own research and decide what is right for you before investing in any asset. If necessary, seek the help of a certified professional in discussing your options.



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