We dislike emergencies because they often happen at the worst times {like when your husband hits a deer on I-95N the day before you are supposed to fly out to a wedding – yes, true story!}. They are inconvenient and can often cost a lot of money.
If you’ve lived long enough, you have probably come to realize that it’s not a matter of IF emergencies will happen, but WHEN emergencies will happen. So, since most of us know they will happen at some point, the best thing to do is to prepare for them. I’ll be the first to admit that preparing for emergencies is not my idea of fun, but I’ve learned that they are less stressful when you have some sort of plan on how to handle them.
The main way we prepare for emergencies is by keeping an Emergency Fund.
What is an emergency fund?
An emergency fund is a specific account where you set aside funds for emergencies. Some call it the “rainy day” fund or the “oops” fund, but the name is not the important part. What is important is that you have money specifically set aside for emergencies that will eventually arise.
Why not use credit as my emergency fund?
Some of you may be thinking that your credit cards have been working just fine for emergencies. After all, if you are like us, you probably get offers all the time for 0% APR cards, so it might not seem like the end of the world to just put it on credit. Since this series is about how we are able to live on a teacher’s salary, let’s just say that we don’t have much room in our budget for paying off debt.
Setting up your emergency fund
One of the important things about an emergency fund is that it be liquid. This means that you need to be able to access is without being penalized. As Dave Ramsey suggests, if you have to pay a penalty to take the money out, you will be tempted to avoid using your emergency fund and resort to putting it on credit. Again, as a single income family with a tight budget, debt is not an option for us, so we took Dave’s advice and keep ours in a savings account. We have been discussing moving it to a money market account which earns a little more interest, but we just haven’t made the final decisions on that yet. Remember: This is not an investment account whose goal is to earn interest or dividends, but rather a way to help you deal with emergencies when they arise. Investment accounts are an entirely different topic.
Here’s what we did {and is based off Dave Ramsey’s baby steps}:
1. Start out with $1000
We found that this didn’t take long at all, since we already had a little bit put aside. Even if you are starting from scratch, I would recommend you focus on getting this money saved as quickly as possible, to the point where your neighbors wonder if there will be anything left in your house! This is the only buffer between you and an emergency, so it’s important to save as fast as you can. You might think this isn’t much money for emergencies and you would be correct. Unfortunately, this amount of money can go very quickly depending on the severity of the emergency, but this is simply your first step.
2. Build your emergency fund to 3-6 months worth of living expenses, once you have resolved your other debts {except your mortgage}
If you’ve built up some intensity, hopefully you will be motivated to continue saving. Just remember that there will come a time when this money comes in handy, so try to stay focused even if it takes a little longer than you’d like.
How?
– include saving for your emergency fund as part of your budget
– sell things to make extra money
– consider getting a second job while you are working on this goal
Other Tips
Once you have a fully-funded emergency fund, I think you will feel so much more prepared for emergencies. No matter how you slice it, emergencies are still a bummer. But, we have found that we are better able to handle them now that we have an emergency fund. With that being said, here are a few other suggestions when thinking about how to handle emergencies.
Make sure you define emergencies
Once you have started your emergency fund, make sure you {or you and spouse} have defined an emergency. It can be tempting to tap into your emergency fund for small little items here or there, and next thing you know you no longer have a fully-funded emergency fund. If you don’t have clearly defined rules on when you can tap into your emergency fund, you may find that you are always taking money out simply because you didn’t stick to your budget or because you want to splurge. Set the ground rules for when you will use your emergency fund and hold yourself {or your spouse} accountable. Your emergency fund should not be considered spendable money on a monthly basis. If it helps, keep the money in a separate bank and do not link your emergency fund to your day-to-day checking account.
Don’t be afraid to tap into it when the emergencies come up
At the same time, don’t be afraid to use your emergency when true emergencies come up. I’ve been guilty of this one because it practically kills me to take money out of our emergency fund once we’ve worked so hard to put it in there. Remember though, this money is your buffer for when emergencies come up. Rather than be tempted to put an emergency on a card, take the money out and use it! You worked hard to prepare for emergencies so don’t feel bad about using the money.
Replenish your emergency fund as quickly as possible
With that being said, once you take money out of your emergency fund, make it a priority to replenish it as fast as you can. If you are following Dave Ramsey’s Seven Baby Steps, this is when you stop whatever baby step you are on and go back to this step. Work to replenish the money in your emergency fund and then you can continue on as you were. If you are like me and hate taking money out of your account, hopefully you will be extra motivated to put it back quickly! {And in the spirit of transparency, we are back to working on this step ourselves. After having a fully-funded emergency fund, we had to take some money out and now we are back to replenishing it as fast as we can! 🙂 }
Very well written! We have our emergency fund at a bank that we don't use as much. The money is accessible, but we don't have it with all our other money. This has worked well for us, but you are right that it doesn't gain a whole lot of interest.
Thanks, Lydia! I think using a different bank for it is a great idea – that way it's accessible but maybe not as accessible to transfer money between accounts at the same bank. Sometimes we have to make it harder for ourselves to get to it or we might be tempted to use it for non-emergencies! Or, maybe that's just me!! 🙂