An emergency fund changes everything. Financial expert Dave Ramsey says, “An emergency fund changes a catastrophe into an inconvenience.” Nobody wants to be inconvenienced, but given the choice between an inconvenient situation and a catastrophic one, the choice is easy.
What It Is
An emergency fund is a set amount of money that you put aside for unexpected financial situations. These situations could be car repairs, health care bills, major house repairs that sneak up on you and more. The emergency fund should be put in a separate savings account and left untouched until you really need it.
How Much to Save
A starter emergency fund can be as little as $500 or $1,000. This will get you through basic emergencies such as most car repairs, an ER visit, a computer crashing or the washing machine breaking down and needing to be replaced. A long term goal should be to have three to six months income saved up in an emergency fund. This is a little different. When your emergency fund grows to this amount, you are preparing for the possibility of losing a job. With a six month emergency fund, you can live easily for six months, which gives you time to find a new job.
Why the Emergency Fund Is Important
Peace of mind is the most important side effect of the emergency fund. When you know that you have enough money tucked away to cover major and minor issues that might come, you will sleep better at night. An emergency fund takes the financial stress out of already stressful situations such as job loss or a medical crisis.
An emergency fund makes fixing a problem faster and easier. An unexpected bill can be paid immediately and you can move on with your life without stress or worry. When the car breaks down, you are not without a car for a month while you try to scrape up the funds for the repair.
An emergency fund also reduces debt. When you have the cash put away, you will not have to resort to credit cards when the unexpected occurs. This helps your long-term financial position.
And remember, as Dave Ramsey says, your catastrophe is not just an inconvenience. It’s never fun to pay for a major car repair or medical bill. It’s inconvenient. But when you have the money on hand to pay the bill, it removes the worry and the urgency. Your catastrophic situation is now nothing more than an inconvenience.
Whenever you dip into your emergency fund, remember to replace the funds as quickly as possible. Another emergency will come up, so be prepared by building your fund back up to its original amount.