Have you ever found yourself in a financial emergency?
What did you do?
For me, I did one of two things:
Either use my credit card…
Or rely on friends and family to loan me some money.
If you would ask most Americans today, they would say the same the same thing.
According to a GOBankingRates survey, 39% of Americans have $0 in savings.
Zero. Nadda. Zilch.
In other words, over a third of Americans can’t even scrape together at least $500 in cash without asking for help.
Sounds pretty bad, right? Because it is. Stats like these remind me that there is a lot of work to do in educating folks on financial matters. That is why this site exists.
Have you heard of an “emergency fund”?
I am sure you have. If you haven’t, it is cash savings that have been set aside specifically for emergencies. It is cash money. That is readily available at a moment’s notice.
What is an emergency?
This is probably one of the most debated items around: What actually constitutes an emergency?
I remember one time trying to withdraw money from my 401(k) when my money was tight. There were a couple of restrictions on it.
I actually think the restrictions on my 401(k) serves as a good grid for what constitutes a financial emergency. I came up with my with my own list inspired by my company’s retirement withdrawal restrictions. Here is a real high-level list of some examples. Note that one size does not fit all so think through what a financial emergency looks like for you as you look through this.
- Medical – you have a pile of medical bills waiting for you after a trip to the emergency room
- Family – a death in the family and you have to take care of the funeral costs
- Housing – your house burns down like my fellow blogger Dollars Dads Debts
- Job lost – you got fired, but still need to pay bills
What an emergency isn’t
I will want to dig deeper here.
How does one define an emergency? I’ll be honest to say that I have used my emergency fund to buy a new laptop when my old one broke. Yes, I considered that an emergency (at that time in my life).
Let’s look at some more examples:
- House being burned down (happened to my fellow blogger Dollar Dads Debts)- emergency
- Car totaled – possibly an emergency (if use the car for work)
- Furniture destroyed – a major inconvenience, but not an emergency
- Engagement ring misplaced – an expensive mistake, but not an emergency
- Laptop broken – an unfortunate event, but not an emergency
- Favorite shoes ruined – things happen; not an emergency
How do you build your emergency fund?
Let’s say you don’t have any money saved. What do you do?
It is pretty simple: you save less than you earn. The hard part is saving consistently over many months and years. But, If you need cash fast, consider selling stuff in your apartment or house. It is surprising how much you can make from selling your stuff to people.
What happens if you find yourself in an emergency?
Use the money. That is what it is for.
But the key here is to replenish it as fast as you can. My mother-in-law told me always told me to keep a $20 bill tucked in behind my ID card in my wallet; separate from the cash found in the money sleeve.
Because Cash is king in NYC, I would always find myself without cash at the most inopportune times.
The $20 wallet trick bailed me out so many times. After spending my secret $20, I would immediately find an ATM and replenish it.
The best time to build an emergency savings fund is when you don’t need it.
If you are not in an emergency, I would start building up your savings pronto. It should be a daily rhythm that you should integrate into your daily money habits.
Imagine if you saved $20 a week, by the end of the year you will have more than $1000.
How much should be in your emergency fund?
That is up to you. To echo personal finance guru Dave Ramsey, I would say $1000. Or at the very least $500.
These amounts should be enough to get you out of an immediate jam. It should be enough of a buffer to prevent you from having to use your credit card or call on others.
Where should you put your emergency fund?
An emergency fund is not an investment, so don’t treat it like one. Put your savings in a savings account that is readily available. I have heard advice on putting your savings into a money market or another investment vehicle. I don’t think this is wise, because if you are in an emergency, the last thing you are thinking about is your interest rate or rate of return.
To go one step further, I suggest storing a portion of savings in cold hard cash. Yes, this is a boring option, but it is the smart thing to do.
Have you ever been without cash with no ATM in sight? Not fun.
Lastly, make sure to also have a stash of cash at home. Have it stored in a secured place. I discuss the importance of having cash on hand in a previous article.
The worst thing you could do for your finances is to add debt on top debt. An emergency fund helps you to not do that.
It is better to be safe than sorry. So start building your emergency fund as soon as possible.