How (and Why) to Build an Emergency Fund

What would it mean to you if you had an unexpected trip to the emergency room? If your car required an expensive repair? What if your income was interrupted for a week, or two weeks, or even longer? Do you have an emergency fund built into your budget to see you through these everyday calamities, or are you only one missed paycheck from disaster?

According to a survey released by Bankrate, 60% of Americans do not have the emergency savings to take care of a crisis that costs $1000 or more. How do people handle unexpected expenses? According to the survey:

• 40% would use savings
• 15% would use credit cards
• 14% would cut back on other spending
• 13% would borrow from friends or family
• 6% would take out a personal loan

Many said they had no idea how they would cover an unexpected expense of this magnitude. And Forbes says that 23% of Americans save no money at all – but I suspect that number is higher since other reports say that 43% of Americans struggle to pay for food and rent. And when you’re in a financial hole, it’s harder than ever to dig yourself out with a system that seems to be designed to work against you. (If you’re in a situation in which you can’t even pay your current bills, see this article.)

So what about you? Do you have an emergency fund? It’s a very important thing to put money aside for a rainy day.

An emergency fund is a vital prep

When your finances are tight, sometimes your first impulse is to spend every dime.  Many people focus on things like paying off debts, stocking up on food and supplies, or paying more than the minimum payments on bills.

However, that may not be your best bet.  Don’t get me wrong – paying off debt is absolutely vital,  but most experts recommend establishing an emergency fund as the first step back to financial security. There are several reasons why this should be a priority for you:

• What if you suddenly lost your job and it was 6-8 weeks before unemployment payments began to trickle in?
• What if your child suffered a medical emergency and you needed to purchase an expensive medication?
• What if your refrigerator began making a death rattle and you needed to buy a new one immediately in order to save your expensive frozen food stockpile?
• What if your car, that you needed to get back and forth to work, required a costly repair?

The reasons you might need to tap into an emergency fund are as varied as the news headlines – there are many different disasters that can arise, and nearly every single one of them will require that you have some additional funds available.  You simply cannot call yourself “prepared” if you don’t have the currency on hand to see you through the rough spots.

It’s important NOT to rely on credit cards, overdraft, and lines of credit for these unexpected events – these things will cost you far more in interest in the long run. Credit cards are NOT an emergency fund. An emergency fund is currency that you have on hand that will not cost your interest. Don’t make your personal disaster worse than it already is by paying compounded interest on it for the next two years.

How much should be in your emergency fund?

This is one of those numbers that will vary with different families. Most experts recommend a starting point of 1-3 months of expenses. And by expenses, I mean everything from house payments to car payments to projected utilities to food costs.

Don’t underestimate how much it takes to run your household every month – be sure to account for all of the regular expenses you might need to cover during an emergency situation.

In addition to an emergency fund in cash, other prepper items can help see you through a rough spot. Your general supply stockpile and your food pantry mean you have to spend less money on day to day items when times are tough.

When budgets are tight, how can you bankroll your emergency fund?

If you don’t have some rainy day money set aside, it is of the utmost importance that you fund this right away It’s time to change your financial lifestyle.  Hardcore frugality is the answer. If you don’t have enough money set aside to weather a crisis, then you need to cut your spending to the bone until you do.

• Most of us have some places that we can cut the budget. To put it into perspective, a fancy frozen coffee concoction from Starbucks is about $6.  Today,  the price of silver is just under $20 per ounce.   Three and a half days without Starbucks =1 ounce of silver.  Exercise some “tough love” and strip your budget down to the bare bones until you have a month’s worth of expenses put aside.
• Sell something.  Do you have a basement full of unused relics? Exercise equipment, old furniture, unused appliances -all of these things taking up valuable storage real estate can help you to establish your emergency fund.  Hang on to things like gold and silver jewelry, though – it will increase in value.
• Get a second job. You don’t have to plan to work two jobs indefinitely, but spending one day a week babysitting or taking on a different part-time job can help you get your savings into the comfort zone.
• Make only your minimum payments.  I realize this is not the standard financial recommendation, but until you have a one-month rainy day fund set aside, you should forgo making the extra payments even on interest-bearing accounts.
• Eat cheap for a few months.  If you can manage one cheapo meal a day, this can result in massive savings. Look into different meals that are less than a dollar per serving – generally, these will be vegetarian offerings like beans and rice, a bowl of cereal, or eggs and toast. Soup is also a great budget-stretcher.  Cheap doesn’t have to mean unhealthy – we never eat things like Ramen noodles in our family but we manage to have frequent low-budget meals that are tasty and filling. For the love of Pete, don’t eat out – the cost per serving is 5-10 times the cost of making the same dish at home.
• Get rid of some fixed expenses. If you can get rid of some of your monthly fixed expenses, you can build your emergency fund very quickly. Cancel gym memberships, extracurricular activities, phones, satellite, cable, and internet.  Funnel all of that money towards your emergency fund. Once the fund is built, you may discover you didn’t really need those services as much as you thought you did.

What constitutes an “emergency” worthy of dipping into the fund?

Once you have your emergency fund established, you might wonder, “What can I spend this on?”

Ideally, nothing. The goal is never to spend this money.  This little safe full of money squirreled away is there for situations that cannot be addressed with your regular income.

Here are some things that are NOT emergencies:

• Trips to the mall
• Concert tickets
• Vacations
• Your 346th pair of shoes
• A celebratory dinner at a nice restaurant
• Cell phone bill

Ask yourself a few questions. Will it cost me more money if I do this later rather than sooner?  Is the expenditure related to a safety issue?  Is the expenditure related to a health issue? When will you have the money to pay for this out of your regular income?

• Refrigerator
• Car Repair
• Medication/Medical Bill
• Washing Machine (not in all situations, but if you have a baby in cloth diapers it’s pretty vital!)
• Utilities that will result in reinstatement charges

Only you can judge whether or not an event constitutes an emergency.  If you must use money from your emergency fund, make it a priority to replace that withdrawal as quickly as possible.

Make this the year you get your finances under control

If you don’t have an emergency fund, take your preparedness to the next level.   Get financially prepared for those unexpected “rainy day” moments. Then, make a concentrated effort to reduce (or completely get rid of) debt. If a financial disaster were to strike, the less debt you have, the fewer payments you would have to make until you got back on your feet.  Other preps will go a long way toward helping you through a financial emergency, too. Never underestimate the value of a fully-loaded pantry.

For those of you with a little bit of money squirreled away,  have you ever experienced an event that made you relieved that you had an emergency fund?  I can think of at least 20 times that my rainy day savings helped me immensely. Your comments can be very inspiring to those who are new to this kind of financial preparedness.