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Having emergency cash on hand is so incredibly important because you can never plan for a true emergency. Having an emergency savings fund in place ensures that the money will be readily available if or when an accident occurs.
I tell this story a lot, but last year, around the holidays, my 6 year daughter was in the hospital for a double kidney infection that popped up out of nowhere. We had to stay overnight for 3 nights before being discharged and it was crazy intense. Just the food cost for me, my husband, and toddler was over $400 during that time.
Had we not had an emergency fund, we would have had no money for food and been starving or borrowing money from others to get by. Because we had the emergency fund, we were able to cover this unforeseen expense.
So because I feel so strongly about emergency funds and want to see you become financially successful, we’re going to cover all of the basics including:
- What is an emergency fund?
- How an emergency fund is different than a sinking fund
- About Dave Ramsey’s emergency funds
- Building an emergency fund
- The best accounts for an emergency fund
- Examples of when to use the fund vs when not to use the fund
- Plus some FAQs about Emergency Funds!
What is an Emergency Fund?
An emergency fund is a specified set amount of money that has been allocated to the unforeseen. You’ve set money aside into special savings for the purpose of covering emergencies with the funds inside.
You never know when unexpected things are going to pop up and block your path to financial freedom. Having emergency cash easily accessible is a great way to take the storm head on.
Even if the funds you have don’t cover the bills completely, it’s enough to make a dent and to provide some amount of relief.
How an Emergency Fund is Different Than a Sinking Fund
This answer is actually pretty short and sweet- emergency savings are created without an actual event in mind whereas a sinking fund is when you save up a specific amount of money for a specific purpose.
About Dave Ramsey’s Emergency Funds
If you know who Dave Ramsey is, then you know he’s a self-made millionaire who talks about getting out of debt using the famous 7 Baby Step Program and he’s the author of several books, a website, a podcast, etc.
I personally own several of his books, and my husband had a picture taken with him in his studio and got a book signed for me. My favorite book of his is The Total Money Makeover, it’s what opened my eyes to being even more active with our debt paying, even if it took a few years to put into action.
Anyways, two of his 7 baby steps are about emergency saving funds. Step 1 and step 3.
Step 1 Baby Step Emergency Fund
Also known as Dave Ramsey’s $1000 emergency fund. This is when you have all of your bills caught up and current, meaning you aren’t behind on rent or receiving utility shut off notices.
Your goal is to save up a 1000 dollar emergency savings fund as fast as possible. This is your “baby fund” as it isn’t meant to cover much, and it’s supposed to keep you financially motivated through step 2 (which is pay off all of your debt besides the mortgage).
Some people have savings funds that far exceed $1000 when they start the program but have debt too. For these people, Dave tells them to pay off as much debt as possible and bring the savings account down to $0 unless there is a likely chance of a layoff or some other storm that needs to pass.
Step 3 Baby Step Savings Fund
After you’ve become debt free (or mostly debt free) you can have a Dave Ramsey fully funded emergency fund. This is when you get to bring those numbers up way past that $1000 you started with.
The goal, in this case, is to bring your savings up enough that it can cover 3 months, 6 months, or even 12 months of your bills. If you lost your job tomorrow, you’d be able to know that even in a tough economy where it’s hard to find work, you can still keep a roof over your heads and bellies fed.
After that baby step you move on to investing, paying off the mortgage, saving up for college (for yourself or kids) and then by the time you finish you’ll be completely debt free at baby step 7 which is when you’re wealthy enough to give back. -Just in case you were curious to know more.
Building an Emergency Fund
For anyone that has never saved money before without spending it, saving $1000 can be a challenge! You have to have the right money mindset to do it successfully.
For those with financial insecurities and a large savings fund, it can be hard to watch that much money go. We’re going to assume you have no savings or safety nets at this point and that you’re starting from $0.
Some tips for getting emergency cash
First, make a budget with your money so that you can see how much you have coming in and going out to bills and other expenses.
Then, look for any leaks in the budget, small costs like subscriptions that you may not even notice right away. Put a stop to those quickly.
Find areas in your budget to cut costs and embrace radical ways to save money.
Look for additional ways to make money. SAHM’s can make money and so can working parents through side hustles and money back apps you can get additional money in no time.
Heck, you can even get the kids to get jobs! Kidding, but if they want to earn money for a new toy or something, why not?
The Best Accounts for an Emergency Fund
You want to make sure that your emergency savings account is somewhere that you can access it quickly in the event of an emergency while still not being too easily accessible and tempting you into spending it on something frivolous.
Personally we keep our emergency cash in a side savings account that is still linked to our checking account. This way we can move money over in just a few seconds with the click of a button but it’s still out of sight, out of mind when not in use.
That being said, with money just sitting there, why not get something out of it?
I’m not talking about investing your money- that’s a horrible idea. But most banks will offer a nice return on your investment with a little compounded interest.
Why you shouldn’t you invest your emergency cash:
Imagine, putting $1000 in the stock market or even just your Acorn investment app. Now, it could grow quickly and well but there are some things to consider as well:
- What if you need the money like NOW?
- It’s going to take a few days for the money to be transferred to your bank account to be usable, and that’s assuming you don’t have to worry about weekends or holidays getting in the way and causing further delays.
- What if there’s a dip in the market and your money becomes worth less than your initial $1000 investment?
- Now you’ve lost money that you won’t get back because you have to pull it out before the stocks climb again. The phrase is “buy low, sell high,” not buy and sell low.
These two reasons alone should scare you into thinking of a safer place to put your money.
Why you should look for high-yield bank accounts:
While emergency money isn’t supposed to do much other than cover accidents and true emergencies, if you won’t be touching it for a few months, and the bank is technically using it anyway, why not get a little something out of the deal for yourself?
Most banks have an interest rate of close to 1% for savings accounts with $1000+ and the interest rates vary per bank and amount of money, so every situation is different.
You can find some banks with savings accounts that have closer to 2% or even 3% APY, these are normally the smaller bank chains. having your money at a smaller bank that isn’t your regular bank could also be a good way to prevent tempting you to spend it on things you don’t need.
Note: You’ll be making a few pennies or dollars on the account per year, so this isn’t something that will give too crazy of a return.
Another Placement Idea for Your EF Fund
CD’s and Bonds are other options for getting a return on your EF. They offer a higher interest rate than a savings account and after the bond has matured you can leave the money in or take it out without penalty.
The penalty is the worst part of early money removal from these things. There’s usually a fee for getting your cash out early, but the money you get out of the interest from not touching it all year is a great way to help fund Christmas.
Clarification- I meant to use the interest to cover Christmas, not the EF fund! Christmas is a predictable expense and therefore not an emergency.
Examples of When to Use The E Fund vs When Not to Use The E Fund
There are many times that you will feel like something is an emergency, but in fact, it’s not. The amount of people that go into debt every year for Christmas is astounding, and many of them claim it’s because they didn’t have the cash.
Examples of non-emergencies:
- Suprise sale/discount at your favorite store
- If the words “it’s a great deal!” come out of your mouth
- A downpayment for a car or home
- Remodeling your home
- Your dishwasher breaks
- You were too tired to cook dinner and were passing by a fast food place anyways
Examples of emergencies
- An unexpected medical situation
- A car accident
- A plumbing pipe in the house breaks
- Job loss
- The safety or security of your family is at risk unless you do something
While you should have separate sinking funds to cover things like your auto insurance deductible in the event of a crash, having the emergency funds to cover the immediate costs associated with it is also nice.
Carseat replacement, missed work, medical bills, and transportation until a new vehicle can be found are important, and it can often take a few weeks before getting cut a check from your insurance company.
A true emergency is something unplanned, and unforeseen. Something that can disrupt your lives and put your family in danger if not taken care of.
FAQs About Your Emergency Savings Fund
A few commonly asked question that I see about EF funds are:
How much should I put in my emergency fund?
You should have enough in your fund to cover a few month’s worth of living expenses in the event of a job loss or sudden disability. You can calculate a good estimate by using this emergency fund calculator.
If you follow the Dave Ramsey recommended emergency fund advice, you’;l; need a $1000 starter emergency fund before paying off debt and upgrading to a fully funded emergency fund.
Should your emergency savings fund be in cash?
You see the news reporting on mattresses or couches full of cash every once in a while that someone finds after the item was donated to Goodwill or the Salvation Army.
Imagine the loss and frustration of losing a large lump sum of money like that! Or in another way, like fire, water damage (flood), etc. Although keeping it in the bank may suck for many reasons, it may be one of the safest places to keep your emergency savings fund.
So to recap, You want your emergency savings fund to be someplace easily accessible while not being too tempting to spend. You want to keep it reserved for true emergencies and not spend it on things that you could easily afford with proper budgeting. and, you should make sure that you have enough to cover the basics, even if it won’t cover some of the costs.
I hope this article has been helpful to you and planning out your EF fund!
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