One of the best pieces of advice we received before we started our debt free journey was to build an emergency fund.
When we first committed to paying down our debt, we were overwhelmed and didn’t know where to start. It was a lot of debt and it seemed like our budget would never allow for us to make even the smallest dent in it. Read more about how we became debt free.
But time and time again we read about the importance of having an emergency fund.
And I’m so glad that this was the first step we took.
It seems counter intuitive to save money when you want to pay off debt. But trust me (and countless personal finance experts) when I say it is crucial to your success.
There were several times while we were laser focused on paying off debt we would have been sidetracked had we not had an emergency fund.
For example, we had to take our dog to emergency vet care in the middle of the night which I’m sure you can imagine is not cheap. They offered us a payment plan but that would have increased our debt. We were able to pay the bill in cash.
There were less expensive emergencies including a flat tire, refrigerator repair, and unexpected doctor’s visits.
These were all funded from our emergency fund, allowing us to continue to make progress towards paying down on our debt.
We never had to take on additional debt to cover these expenses, nor did we come up short at the end of the month because of these expenses.
The emergency fund was our “secret sauce” to paying down debt and staying debt free. And I’m here to share the secret!
What is an Emergency Fund?
The core difference between an emergency fund and other savings accounts is you only use the funds in an emergency fund for true emergencies.
But what defines an emergency? The key to defining a true emergency is that it is an unforeseen need. It is NOT an unforeseen want.
If you run out of money at the end of the month because of overspending and poor planning, this is not an emergency.
Here are examples of true emergencies:
- Job Loss – This is one of the most serious and frightening personal finance emergencies. If you experience job loss, you can use your emergency fund to help you pay for rent/mortgage, groceries, utilities, etc.
- Medical Expenses – Little Johnny breaks his arm, or you need an emergency root canal. These are unplanned costly expenses that cannot be put off.
- Home Repairs – If your water heater bursts, or your refrigerator stops cooling, these are emergencies. However, if something breaks that can wait to be replaced, save up for it. Do not use your emergency fund.
- Car Repairs – A flat tire, or any other unexpected repair, falls into this category. Expected maintenance such as an oil change, routine tire replacement does not constitute as an emergency.
Dave Ramsey recommends a minimum emergency fund of $1,000 if you are paying off debt. If you are debt free, your emergency fund should be 3-6 months of living expenses.
There is one caveat. If you are in an unstable job, you may consider increasing your emergency fund to cover at least a month or two of living expenses.
No matter how much you put in your emergency fund, the most important thing is that you have one that will cover you for financial emergencies.
Why is an Emergency Fund Important?
Life happens while you are planning. Even if you are armed with a budget and have everything planned things happen.
To continue reducing your debt or living without worrying about what you would do if a crisis hits, you need a plan that will ensure you do not acquire new debt.
How to Save For an Emergency Fund
Savings should be part of your budget. Period.
If you don’t have a budget, Start Here.
But don’t think you need to have a FULL emergency fund immediately. Because you don’t. While there is a benefit to filling up your emergency fund sooner rather than later, you can only do what your income and budget allows.
I found the best way to stay consistent and committed to putting money in savings is to set up automatic transfers from our checking account to our savings account on pay days.
If you choose this method and you are paid bi-weekly, you will need to deposit $38.50 each pay period to your emergency account to save $1000 in 1 year. Not bad right?
If you don’t have room in your budget now to put money towards an emergency fund, here are ways to find additional money to add to your emergency fund:
- Save Your Change: All that extra change adds up. Even if it’s just a few cents, put your change in a jar to help add a few extra dollars towards your emergency fund.
- Cut Your Expenses: Find creative ways to reduce your monthly expenses. Here are 31 simple ways to reduce your monthly expenses.
- Find Additional Forms of Income: You could get a quick boost of income by selling things or by finding a side job like dog-sitting or babysitting for your neighbors.
- Extra Paychecks: You know those months with extra paychecks? That’s a great time to take that extra paycheck and add it to your emergency fund.
- Tax Refunds: Put some, if not all, of your tax refund into your emergency fund. This is a great way to give that emergency fund a boost. You can do your taxes for free (both state and federal) with CreditKarma Online Tax Filing.
- Use a High Yield Savings Account – If you’re going to save you might as well earn some interest on it! Using a high yield savings account like those offered by CIT bank can help you earn money just by saving.
- Use Free Apps to Earn Money – There are plenty of free apps that can help you earn cash. Ibotta is a great way to earn money on purchases, while an app like SaverLife rewards you with cash and prizes for reaching savings goals.
Where Do You Keep Your Emergency Fund?
Ideally, you should have a separate savings account for your emergency fund. Preferably a high yield savings account.
We have several savings accounts, each with its own purpose. We have an emergency fund savings account, a savings account to pay taxes from, and a vacation savings account.
No matter where you keep the money, the rule of thumb is that the money is quickly accessible in an emergency but not so accessible that it will tempt you to use it for non emergency spending.
If you don’t have a funded emergency fund, start saving for one today. Include space in your budget to save for an emergency fund. If you don’t have room in your budget right now, find ways to save money or find additional income.
If you need help with creating a budget, check out the easiest way to make a monthly budget.