When I started working, I always felt it was important to save. I called it my Rainy-Day Fund. I would withdraw from it whenever I ran a little short from overspending. It prevented me from ever having to borrow money from others. I never understood the point of borrowing because you would eventually have to pay it back and then be short once again. It seemed logical to just spend less and save more. It’s always good to be able to keep a few thousand in the bank just in case. This was the beginning of my Emergency Fund Savings saga.
Fast forward to life happening, getting married, having children, and buying a house all in within a year. That can really tax a budget and exhaust a savings account. Leaving us to live paycheck to paycheck. For the first time, there were more bills than a paycheck. We could certainly use an emergency fund now to get by.
Emergency Fund and Financial Independence and Security
First, the main benefit of an emergency fund is that you are prepared for life to happen. Second, you do not have to borrow from friends or family. Per Synchrony Bank Survey 99% of savers say independence means the ability to pay all bills each month. Third, you are on the road to financial security. You can now begin investing in your future. Once you reached your goal of 3-6 months of expenses you can begin to move those funds into investing in a retirement fund. Per Synchrony bank 92% of savers associate financial independence with a retirement plan. Finally, you can then begin to save for your children’s college funds. The sooner you begin faithfully saving you can begin to secure your future by having your money begin to work for you.
I have followed this plan for years and now my fully funded retirement plan is working hard to reach our goals of retirement. Money makes money. It all started with the Emergency Fund.
Emergency Fund Savings and Job Security
Some people are blessed with being on the same job for 20 plus years receiving incremental raises, with a 401k plan and a pension. This is the American dream that many do not experience. Instead, some have experienced job loss multiple times over their careers. Without job security, this can wreak havoc on a budget. While looking for another job unemployment just does not cut it. It barely covers rent or the mortgage not to mention food, utilities, and transportation. Here is where your Emergency Fund kicks in. Unemployment now becomes a supplement to your Emergency Fund making your 3 to 6 months savings last for 6 to 9 months affording you plenty of time to find just the right job at just the right pay to re-build your emergency fund. A win-win!
Now you can be Generous
Imagine being able to help others in need. Those who have not yet been able to set up their own Emergency Fund. You now have the opportunity to share why you are able to help without it being a hardship to yourself. This gives them time to get on their feet and to hopefully pay you back. However, if they can’t it will not harm your finances in any way. Therefore, you should have about 4 to 6 months saved and have a set amount you are comfortable lending with the expectation that you might not see this money again. Think of it as a gift that if it is returned it is a blessing.
Set up your Emergency Fund Plan
It took years of working to get out of debt, living within our means to get back on track with having an Emergency Fund. As we began to make more money and work our budget, we were able to free up funds to create an Emergency Fund. Not only did we create personal emergency funds for each other, but we also created an Emergency Fund for the house.
The need for an emergency fund savings goal is an important part of the budgeting process. Set it up as an automatic transfer per your payday. I would transfer as little as $5 up to $50.00 per pay period based on your salary and current expenses. I began small with a starter fund of $500 to $1000 to cover small unexpected expenses like medical co-pays, dental bills, small car repairs, unexpected guest expenses. Once you have at least $1000 begin to move into creating a real Emergency Fund savings account. This should cover 3 to 6 months of living expenses.
Your living expenses should include the following:
If you have saved a 12-month emergency fund you can then include other expenses such as loans, credit cards, etc. Use this Emergency Fund Calculator link to help you determine how much to save and for how long.
Best Emergency Fund Savings Accounts
Finally, once you hit the $1,000 mark, consider moving your funds to high-yield savings accounts. This is where I recommend putting emergency fund savings. This type of account pays more in interest than traditional savings accounts. Per Money Magazine High-Yield savings accounts have much higher interest rates than standard savings accounts, with some offering up to 5 times the national average. It allows your savings to start working for you. Look for accounts that have no minimum balance requirements or administrative fees and are FDIC/NCUA insurance.
In conclusion, having Emergency Fund Savings account is one of the main components of managing a budget. It is one of the engines that drive the train to financial security. It will allow you to have financial independence, to eventually save for your future, and help others in need. Read my blog Checking and Savings Accounts to learn more. If you are just starting your budgeting journey please read Setting Up a Budget for Beginners.
Let’s Budget, Spend and Live.