This is a personal finance blog, so it’s no surprise that we focus a lot on saving money. Several of our recent posts have covered retirement savings, but today I want to look at emergency funds. Saving for retirement is important for your future, but emergency funds are important for your present.
Without an emergency fund, you can’t address the little financial emergencies that arise in everyone’s life now and then. So if you’re always living paycheck to paycheck, you’ll probably be under a lot of stress.
You’ll feel less stress when you know that you have a little money put away to deal with issues as they come up.
But just saying you need an emergency fund may not seem very helpful. If it was so easy, everyone would have one, right? Humans are creatures that crave instant gratification and saving can seem boring compared to that.
Let’s dive a little deeper into how much you’ll need to save for an emergency fund, and how to save for one in the first place.
How Much of an Emergency Fund do you Need?
A good rule of thumb is to have 6 months of expenses saved in an emergency fund. So, if your monthly fixed expenses (rent/mortgage, utilities, food, gas, insurance, etc.) equal $2,500, you’d want an emergency fund of $15,000. The reason the amount should be based on expenses and not income is your income may be much more than your fixed expenses, and it’s not necessary to cover that much in the case of an emergency. Most people are capable of cutting back their variable expenses (eating out, gifts, etc.) in an emergency.
Of course, it’s possible that 6 months is too much or too little based on your individual situation. If you’re in a two-income household, there’s less risk from one person losing a job, so it’s possible you could lessen the amount you need in your emergency fund. On the other hand, if you’re in a one-income household and that one income comes from a job that’s not very stable, you might want to increase the amount in your emergency fund.
This emergency fund should be highly liquid and secure. You have to be able to access it quickly if you need it. And you want to know that it will all be there when you need it. So, you definitely shouldn’t invest the money in the stock market or in anything high-risk. Yes, this means you’ll be forgoing some growth, but you’ll have the benefit of knowing your money is there for you.
I keep my emergency fund in a Capital One savings account that brings in .75% interest per year. That’s obviously not great, but the point of this fund is security and not making more money. You might be able to find a savings account with better interest. I’m thinking about setting up a CD ladder with my emergency fund, as I could get a better interest rate and still be FDIC insured. Of course, there are small penalties for early withdrawal (in the case of an emergency), but those penalties are trumped by the increased interest rate.
If I do set up that CD ladder, I’ll write a future post detailing the process.
How Do You Save for an Emergency Fund?
I know many of you can’t imagine having enough extra money to save up for a 6 month emergency fund. Here are some ideas for cutting your expenses:
- Check out other cell phone providers. Republic Wireless and Ting offer monthly services under $25. If you’re spending $75 per month now, you could save more than $50 by switching to another service. And that’s just for an individual. If you have multiple phone lines, the savings would obviously be much higher.
- Cut the cord. With NetFlix, Hulu, YouTube, and a myriad of other options, do you really need to pay a monthly cable bill any more? NetFlix’s streaming service is only about $10 a month, and Hulu offers both a free and paid service. Your local library may also provide free movie streaming. You could easily save $75 or more per month by getting rid of your cable bill.
- Use coupons. This option can be time-consuming, but can save you a ton of money off your monthly groceries. Coupon Mom is one of the better sites out there to help you with this process.
- Join a Warehouse Club. I’m a member of Costco, but BJ’s is also pretty good. Not every item that you buy in bulk through these stores will be a good deal, but many of them are. For example, I can buy 18 Eggland’s Best eggs for $1 cheaper at Costco than I can at Publix. I can buy 2 pounds of pecans for about $13 at Costco, whereas the same amount anywhere else would cost at least $20.
- Use baking soda and apple cider vinegar instead of shampoo and conditioner. I know this will seem radical to many of you, but I’ve made this switch and am loving the results. Check out my earlier blog about this here.
And then there’s always the option to earn more money. Again, this may not seem so easy, but there are many ways to accomplish it. This blog entry and this one can help steer you in the right direction.
I know saving for an emergency fund may still seem a little daunting, but believe me, it’s worth it. If you’re presented with car trouble or a medical emergency, you’ll be happy that you have some money set aside. Life is stressful enough without having to worry about how any little issue can leave you without enough money to eat or pay your rent.