Building Peace of Mind: The Importance of an Emergency Fund
#$%^^ happens, folks. We’ve all been there - something unexpected happens that costs money, and often a pile of money, such as an emergency trip, an unexpected car repair, a medical emergency, or a natural disaster. And if you don’t have cash saved in some sort of reserve, the event can have a huge impact on your finances.
Enter the emergency fund.
You’ve seen the (sometimes conflicting) advice everywhere:
You should have 6 months of expenses saved in an emergency fund!
Start with a “baby” emergency fund of $1,000.
There’s no need to have an emergency fund if you are saving for your “true expenses”.
Pay off debt first, then save for an emergency fund.
Don’t start investing until you’ve saved your emergency fund!
Use your emergency fund for car repairs, that’s what it's there for!
Don’t use your emergency fund for car repairs, they are not an emergency.
It’s easy to feel a little overwhelmed after sifting through all of the well-meaning advice online. In this post, I’m going to dive into the topic of emergency funds. I’ll cover whether you need one, when to use it, how big it should be, and where it should be saved.
Do I Need an Emergency Fund?
Yes, everyone should have an emergency fund.
This is because emergencies, by their very nature, are difficult to predict in terms of when they will happen and how much they will cost. And if you can’t predict when they will happen and how much they will cost, it is very difficult to include these expenses as part of your day-to-day budget.
Emergency funds are vital for debt prevention. With an emergency fund, when an emergency happens, you won’t need to use credit or dip into cash allocated for other important expenses like groceries or rent.
Emergency funds give you peace of mind. It is very comforting knowing that I have a stash of cash sitting in a savings account just in case. An emergency fund can be used to get you out of a toxic or abusive work or living situation. With a stash of cash, you don’t have to be stuck in a bad situation. In fact, I’ve seen some refer to an emergency fund as a “peace of mind fund”.
When Should I use my Emergency Fund?
Well my friend … it's your money and it’s totally up to you but it's important to come up with some personal “rules” about when you use your emergency fund. In my mind, an emergency fund should be saved for unpredictable events such as job loss, a health crisis, a home repair due to a natural disaster, or an emergency trip (and no, your trip down south for a much-needed vacation is not an emergency).
On the flip side, it’s also important to decide what isn’t an emergency. For example, having to replace your car tires due to wear and tear is entirely predictable and not an emergency. Your roof needing to be replaced due to age is also not an emergency. Find another spot in your budget to save for this normal wear and tear on your vehicle and home and other “true expenses”.
How Big Should My Emergency Fund Be?
There is a lot of conflicting advice out there in terms of how “big” an emergency fund should be. I’ve seen it all: a $1,000 “baby” emergency fund to start, 3-6 months of bare minimum expenses, and 3-6 months of your full monthly budget (i.e., no cutting anything, including savings, if you need to use it).
Again, I’m going to do my coachy thing and won't give you a specific answer to this question. It is entirely up to you. However, here are a few questions to consider when you decide how big your emergency fund should be:
How stable is your job?
Do you have health insurance (or, do you live in a country with public health care)?
Do you have disability insurance? How much would it cover in the event of disability?
Are you a homeowner?
Do you live in an area susceptible to natural disasters? (looking at you, Nova Scotia)
Are there areas in your budget you could painlessly cut for several months in the event of an emergency?
Where Should my Emergency Fund be Saved?
Your emergency fund should be saved in a liquid bank account or investment account that is easily accessible in the event of an emergency, without any penalty for withdrawing. It should not be invested in stocks or bonds. There are many high yield savings accounts out there right now with great interest rates.
The ideal location for your emergency fund really depends on how you’ve got your day-to-day money management set up. If you use a budgeting app like YNAB, it is very easy to create a category for it in your budget and the money can be sitting in any of your regular bank accounts. Some people prefer to keep their emergency fund in a different bank than their regular accounts, just to have it that one step removed from their day-to-day finances.
Conclusion
In conclusion, the importance of having an emergency fund cannot be overstated. Life's unexpected curveballs, whether it's a job loss, a medical emergency, or a sudden car repair, can wreak havoc on your finances. Amidst the conflicting advice, remember this: an emergency fund is your financial safety net.
Defining when to use it depends on your personal rules, but it should cover genuine emergencies, not routine expenses. As for its size, consider factors like job stability, insurance coverage, and your cost of living. Keep your emergency fund in a liquid, easily accessible bank account, ensuring it's within reach when life takes an unexpected turn.
Your emergency fund is your peace of mind fund, safeguarding your financial well-being and offering you a lifeline when you need it most.
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