Emergency Fund

Overview

Emergency funds are a fundamental building block of any personal finance plan. According to a 2021 survey, just 39% of Americans have enough money to handle an unexpected expense of $1,000. In 2020, there was an over 30% chance of facing a surprise need for $2,000. These expenses can come from anything at any time, such as a medical bill, car or home maintenance, speeding ticket, you name it. Of those Americans without an emergency fund, 33% would have to go into some form of debt to handle the expense. This debt often comes with high-interest rates, and unprepared individuals can suddenly find themselves underwater, just trying to keep up with the monthly payments on their loans and credit cards. 

How Much to Save in an Emergency Fund

If you don't already have an emergency fund in place, it's important to start small, even if it's just $500. If you can set aside $500 now, that's $500 less in debt that you'll have to incur in an emergency. If you don't have $500 now, that's perfectly fine. Instead, commit a small amount each week or month, say $25, to your emergency fund.

Assuming you've completed step one of this guide, you can also use your budget to determine what a more realistic number is for you. Start by taking the last three to five expenses you had that came out of the blue, and take the average amount. This will likely be between $1,000 to $2,000. Once you have that amount set aside, you will be ready for the next unexpected moment you need that money.

After building and maintaining a small emergency fund, it's wise to save enough to cover anywhere from three to six months of your total living expenses. This way if you ever lose your job or your primary source of income, you will be able to survive on your emergency savings while you find a new stable source of income.

When to Spend an Emergency Fund

It's important to define in advance what constitutes an emergency. This may be difficult to hear, but if your big flat-screen TV stops working, you should think twice before rushing to turn out your pockets for a replacement. Instead, consider keeping a shortlist of what you truly would not be able to live without in case of an emergency. Some examples include transportation to get to work, a computer or similar tool used for work or school, and living necessities such as a working refrigerator. Any sudden expenses that fall outside of this list should likely be built into your budget and saved up for overtime, including that replacement TV!