Why do you need an emergency fund?
Written by: Omkar Kendale
Life is unexpected. You could be happy and successful one week and be struggling to pay your bills the next week due to an unexpected expense. It is important to be prepared for these emergencies. This is where an emergency fund comes into play. If something goes wrong, depending on the amount of money in your emergency fund and the actual emergency taking place, you’ll be able to make it through without a heavy impact on your financial situation. However, not having money set away for emergencies can make your financial situation worse. If you are forced to take out a loan to deal with an emergency, you could get into a lot of debt depending on how long it takes you to pay off the loan. According to stories.td.com, although the pandemic has taught many Americans that an emergency fund is necessary, 29% still do not have an emergency fund. Having an emergency fund is very important and there are three factors that go into maintaining a successful emergency fund. You need to know how to adjust your budget to account for an emergency fund, when you should use your emergency fund, and how much money to put into your emergency fund.
It is very important to know how to create an emergency fund. Many people might think that their budget is too tight to put aside money for emergencies, but you don’t have to gather the money all at once. Bankrate.com says, “Make small goals at first, such as saving $100, and then work your way up to a reserve to cover several months’ worth of expenses”. In addition, you should keep your emergency fund in a place where it will grow. For example, a savings account would be a perfect place for your emergency fund, since you won’t have to withdraw from it too often and it offers interest on your money. If possible, look for an account that doesn’t charge monthly fees or requires a minimum balance to avoid losing some of the money you make off the interest on your emergency fund. You don’t have to set aside all the money for your fund now, but if you don’t have an emergency fund, you should start setting aside at least a small amount of money as soon as possible. If you are struggling to find money to set aside, consider selling items you don’t need anymore and make sure you are spending your money wisely.
An emergency fund should be strictly for emergencies. An emergency fund becomes useless if you spend it on things that aren’t really emergencies. According to thebalance.com, you shouldn’t spend emergency funds on periodic expenses or non-essential items. For example, you don’t want to use some of your emergency fund on income taxes, because those are predictable and you should already have accounted for them on your budget. You also shouldn’t spend emergency money on things like vacations or a new phone because when an actual emergency occurs, you won’t have any money to deal with it. Your emergency fund should be spent on truly unexpected, necessary and urgent. Examples include living expenses if you lose your job, emergency repairs on your home or car, and urgent medical bills. You want to make sure you are spending your emergency fund on something that is a true emergency or else your emergency fund isn’t an emergency fund.
How much money should you have in your emergency fund? That depends on many factors such as your income, job security, and lifestyle. The recommended amount is six months worth of expenses. This should be sufficient to cover any unexpected expenses you may face. However, if your income is high, you may only need 3 months of expenses since you will be able to make money back quickly after paying off the expense. However, if you have low job security and might be let go of any minute, then you may want something close to 9 months of expenses in your fund, just to be safe. If you live a lifestyle where you are pretty healthy, and most of the stuff you own is new and in good condition, you might not need 6 months worth of expenses, since it is unlikely that you will face an emergency any time soon. It all depends on your life and will be different for everyone. Many websites offer emergency fund calculators which can help determine how much money you should save based on your financial situation. If you want to try one, you can click here.
Creating an emergency fund might be difficult. It can be tempting to spend money on a luxury or something you really want, rather than putting it away in an emergency fund. However, the moment an emergency strikes, you’ll be very grateful that you did put some money away. Even if you don’t end up using the money, and you get to a point in life where less emergencies will happen, your emergency fund will still have benefitted you because it was sitting in a savings account, generating interest. Many people don’t think they need an emergency fund until an emergency hits. The disadvantages of not having an emergency fund far outweigh the disadvantages of having an emergency fund. It is better to be safe than sorry.
Works Cited
7, • Apr. “How to Start an Emergency Savings Fund in an Uncertain Environment.” TD Stories, stories.td.com/us/en/article/how-to-start-an-emergency-savings-fund-in-an-uncertain-environment.
Goldberg, Matthew. “How To Start (And Build) An Emergency Fund.” Bankrate, www.bankrate.com/banking/savings/starting-an-emergency-fund/.
O'Shea, Arielle. “Is Your Emergency Fund Too Big?” NerdWallet, 26 Oct. 2020, www.nerdwallet.com/article/investing/is-your-emergency-fund-too-big.
VanSomeren, Lindsay. “How Big Should Your Emergency Fund Be?” The Balance, 27 Sept. 2020, www.thebalance.com/is-your-emergency-fund-too-big-4142617.
Woods, Joslin. “4 Places to Keep Your Emergency Fund: Discover.” Discover Bank - Banking Topics Blog, Discover Bank, 1 Feb. 2021, www.discover.com/online-banking/banking-topics/where-to-keep-emergency-fund/#:~:text=High-yield bank accounts&text=Not only are your funds,monthly fees or balance requirements.
An emergency fund sounds very important! When we look at economics as a whole, it is easy to think that people can spend as much money as they make, but this turns out to be very dangerous. As always, the economy is complicated, and we need to be prepared for something unexpected to happen!
ReplyDeleteThis is a very important topic to address, especially in these times as many Americans have faced emergencies of all types. It's also important as you mentioned to have your emergency fund separate from other funds, instead of one large fund which covers multiple things. Because if you choose to spend most of your "general" fund on a thing of less importance and an emergency occurs soon after you've spent it, you may not be able to cover the expenses.
ReplyDeleteI think this is a really important topic talked about, I agree with you 100%. Every single person should have an emergency fund because you never know what to expect in life. For an example, covid hit mostly everyone financially and for times like covid, it is good to have an emergency fund kept away in case you actually really need it. There is endless reasons on why it is always good to have an emergency fund. Very well done !
ReplyDeleteI really enjoyed reading this, and after reading your piece I realized how important an emergency fund is. I like that you put quotes from websites in, and that made it a lot more detailed when you analyzed it. I also didn't know that you didn't have to put money in all at once, and you could make small goals which was very helpful.
ReplyDeleteYou make several great points throughout this blog such as why it is very important to not only have an emergency fund, but also what to think about when creating one. Emergency funds should be a part of everyone's life and this helps to make that concrete.
ReplyDeleteThis is a very important topic to address. Many people such as myself forgets about this and how important it is. I feel as if many people have money in their other account they could use as a emergency fund and I like how you mentioned that it is very important to divide the funds so it is not tempting to spend. You give research showing how much you should be putting in but I feel that it is so hard to be able to tell nowadays because so much could happen. Like your kid or wife gets cancer and those bills are crazy expensive if you don't have health insurance. I wonder if someone who can't really afford both what one is more important, insurances or an emergency fund?
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ReplyDeleteCheyenne Kaatz - I really liked your blog because it was definitely an eye opener for me and makes me think that I need one for my future because life is really unexpected and you don’t know when something is going to happen. Covid is an great example of why people need this because at first you have no idea how it is going to impact you financially and how long it is going to impact you, people lose their jobs, homes, don’t have enough money to pay bills - and although I’m not saying that your emergency fund is always going to cover this all but it will at least ease your financial situation with this emergency money. Your graph was really helpful to understand how many Americans have accounts and who don’t and I liked how many times you included quotes from creditable sources because their insight was very helpful!
Having an emergency fund is important because its something you can fall back on for a little bit if struggling financially. Reading this blog and learning something I never knew is really going to help me in the future when I get a emergency fund.
ReplyDeleteI think if people immediately start budgeting into savings, they can build that habit and set themselves up for success. Like right now our water softener is kind of messed up, and my parents have an emergency fund they can use to pay for those curveballs that are thrown to them. We can't rely on technology all the time so we need to be safe. And building an emergency fund is a great way to start.
ReplyDeleteI agree that emergency funds are important. I didn’t realize the number of people who don’t have one was lower than I thought. I know after a few random car issues when I was low on funds, an Emergency fund is exactly something I want to invest in.
ReplyDeleteSuper great blog! This was the perfect topic to address a large group of high school students with. We are frequently reminded that it is important to save for retirement, but we rarely discuss how we should be saving for emergencies. My parents have always made sure we keep a large food storage in order to be prepared in the case of an emergency. This was super helpful when we initially went into quarantine! I’ll have to talk to them now about if we have an emergency fund and how to access it if needed. Overall, fantastic job, Omkar!
ReplyDeleteThis is a great blog and you have strong key points in here that made me want to keep reading. I didn't know the number of people who do not have this. But this is a great blog and maybe this will get people thinking about having one.
ReplyDeleteI really enjoyed reading your blog. I think you did a really great job. And I loved how you put actual quotes from reliable sources. I think that the topic was also nice and something that not a lot of people in high school would know about, and I think its great that you addressed it. I agree that everyone should have a emergency fund. It is a important thing to have and with the world just being the world, I think it is good to have it because you never know what to expect and being the slightest bit prepared by having a fund would be very helpful to a lot of people.
ReplyDeleteGreat Job on this blog. Before reading this I kind of knew what a emergency fund was but I didn't know how to make one. By reading this I have learned a lot about emergency funds and how they are important. I thought that you did a good job at explaining it and giving quotes from professionals and websites to be able to help me understand it more. I thought that it is interesting how emergency funds isn't a thing that everyone uses if they are an adult; I feel like it would be a necessity. Overall, you did a great job on explaining the topic and gave me good information that I can use later in my life.
ReplyDeleteI would agree that having an emergency fund is very important. I know my family has one, but we also have a smaller, more exciting emergency fund! We always keep some “Emergency Moolah” in the car, in case we need it for gas or other problems you would encounter on the road. It’s good to have money set aside for emergencies, but also some for smaller problems too! Overall, this blog was very informative and well written. Indeed, it is better safe than sorry!
ReplyDeleteyour piece! I see lots of people who don’t really understand how important an emergency fund is, so I think this is a great topic to write about due to its importance and the fact that it’s often disregarded. Especially after today’s circumstances, hopefully more and more people will realize the importance of an emergency fund than ever.
ReplyDeleteYour blog was extremely interesting and had a lot of important information to know for the future. One thing that I thought was really important about your blog was how you said what an emergency fund should be used for. Obviously an emergency fund is used for when you have an emergency, but I didn't know that an urgent repair on a house would be considered an emergency. The timing that you gave in order to save enough money to fully fund an emergency fund was really useful and I will definitely consider that information in the future. What percentage of money do you think a person with a job should take out of their monthly salary to put into their emergency fund?
ReplyDeleteI love this article, especially because you include how much money is needed in a emergency fund and how to calculate it. I like the tips for starting the account, looking for an account with little or no fees and saving whatever you can. Thank you so much for the information!
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