This morning I got all ready for work and completed my normal routine. I put my work bag in the car, put the trash can away, and started to back out of the driveway in my 12-year-old car. As I backed out, I felt an odd feeling from the right side, almost as if my car was struggling to move. I initially dismissed it because driving a 12-year-old vehicle comes with new sounds and odd behavior each and every day.
Truthfully, I’m just thankful it continues to start up each and every day. As I drove down the block, the road noise sounded much different than usual. As I slowed to the stop sign, it was now apparent that my car was leaning slightly to the right.
I initially expected something to have broken or fallen off my car. As I exited my vehicle and walked around, I found that my rear passenger side tire was completely flat. Since my home was a short distance away, I backed up to my driveway.
This was not the best way to start a Friday. There I was, standing in my slacks and button up shirt facing a tire that needed to be replaced. Fortunately, I routinely check my spare tire pressure to ensure I won’t be stranded on the roadway. I am in the habit of checking my tires on a monthly basis which takes 10-15 minutes at most. Because I prepared for a flat tire ahead of time, I was able to swap out my spare with the flat in about 10 minutes.
My Flat Tire Could Have Been An Emergency
Because I had the spare tire ready to go, I was only 10 minutes late for work. If I did not have a spare tire that was inflated, I would have needed a ride to the local tire shop to get it fixed and a ride back to install the fixed tire. I have no doubt that I would have missed at least half a day of work due to the flat tire.
In addition to missing half a day of work, I would have been forced to use some of my vacation time to make up the hours I missed. This flat tire could have legitimately ruined the beginning of my weekend.
How To Prepare For Emergencies
After I changed the tire, I started to think about how I prepare for emergencies. By spending 10-15 minutes each month to check on my tires, I avoided using vacation time and a huge inconvenience of getting a ride to and from the tire shop. Preparing for a future flat tire meant that I only was 10 minutes late for work.
This directly ties into my emergency savings account. I went years without having any money in my savings account. I wasn’t in debt but I spent what I made. If there was an “emergency” that occurred such as my refrigerator or vehicle breaking, I had to put it on a credit card.
I spent the next few months paying off the credit card. If I had another unexpected purchase during that time, I would put that on the credit card as well and increase the balance. This was “normal” to me. Years later I now understand the necessity to have an emergency fund.
What’s An Emergency Fund And Why Do I Need One?
An emergency fund is a separate bank account you have that is only used for emergencies. It is a fund that sits dormant in the bank and is only used if you are in a crisis that needs money to fix. This is the fund to help you get your car up and running again or to purchase a “new to you” refrigerator. This fund is to keep you from putting money on a credit card so you don’t waste money paying 16% or more interest on your outstanding debt.
An emergency fund is “insurance” to protect you from life. You are “self-insured” with this fund and you don’t need to rely on a credit card company to save you. By putting a moderate amount into this fund, you can protect yourself from most future emergencies, just like I did with my spare tire.
When Should You Start An Emergency Fund?
If you currently do not have an emergency fund, this should be your number one priority. Even if you have mounting debt and are living paycheck to paycheck, everything should be put on hold until you have an emergency fund. Without it, you are vulnerable to plunge even further into debt.
How Do I Start An Emergency Fund?
Think of an emergency fund as another bill or debt. I recommend a $1,500 – $2,000 fund in order to protect you from most things life throws at you. Give yourself this target and make it your most important “debt” to repay.
In order to start an emergency fund, you need to set up a budget so you know exactly how much money is coming in each month and how much is going out. I wrote an entire article on how to create a budget and I also provide free budget printables. Read the article here: It’s Time To Budget Like A Boss!
Once your budget is started, pay the minimum on all your other debts and put everything towards this savings account until it is fully funded. The fund is to protect you from going further in debt when life happens.
With a solid budget, you should be able to see the minimum amount of money you can afford to contribute to your emergency fund on a monthly basis. This is a great starting point to see where you are at and how long it will take you to get your account fully funded.
How Much Do You Really Need In Your Emergency Fund?
If you have heard of the need for a $1,000 emergency fund, you probably have heard of Dave Ramsey. Dave Ramsey routinely preaches the need for a $1,000 emergency fund before you start paying off debt. While I completely agree about the need for an emergency fund, I strongly believe that $1,000 is not nearly enough.
I base this on my own situation and experiences. A few months ago, my wife’s vehicle started acting odd so we took it to our local shop. After an inspection, they recommended we take it to the dealer because it was a larger problem than they could handle. After taking it to the dealership, we were given a quote of $2,000 to fix the vehicle. Fortunately, we had the extra funds to pay for this repair in cash because we prepare for vehicle repairs.
About six months before that, my vehicle needed a repair that cost $1,200. Most of my true “emergencies” cost much more than $1,000. If I only had a $1,000 fund, I would routinely be putting the extra on credit cards and taking one step forward and two steps back.
For the above recommendations, I strongly recommend an emergency fund of $1,500 – $2,000. Obviously the more the better.
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How Long It Should Take To Fund An Emergency Savings
The time it takes to save up an emergency fund depends on your income and your expenses. If you have a budget in place, you should be able to see how much you can afford to contribute to the emergency fund on a monthly basis. From this number, you can roughly gauge how long it will take to save an emergency fund. The time it takes to fully fund this account is different for every person.
However, with a clear goal in mind, I have no doubt that you will fund this account much sooner than you expected. It’s amazing how much we can accomplish in a short amount of time if we put one main goal in front of us. When I started my first emergency fund, I worked a few side jobs to fund it as fast as I could. The rest of my debt payoff followed shortly thereafter.
To challenge yourself, give yourself a time limit to achieve your emergency fund goal. This will help to hold you accountable and to avoid spending any extra money you don’t need to!
When Should I Use My Emergency Fund?
Your emergency fund should only be touched when you have no other options. Once you have your emergency savings fully funded, you should never put anything else on a credit card (except for extreme emergencies). This means, if an unexpected expense occurs during the month, you should first see how you can pay the bill by adjusting your budget. If you need to stop paying down a credit card or other bill for that month and put that money towards the unexpected expense, that is what you do.
An emergency fund should only be used for those life issues that arise that can not be paid for by adjusting your budget. Great examples for an emergency fund use could be:
- Unexpected vehicle repair
- Large appliance breaking
- Unexpected medical expense
- Other large expenses that are unexpected
You should not get in the habit of using your emergency fund for expenses you know are coming in the future. If you know you are going to need a car repair in the next 6 months, this expense should be configured into your budget so you can pay cash without touching your emergency savings.
Should I Invest My Emergency Savings?
The quick answer to this question is “no.” An emergency savings is an insurance policy against life and needs to be quickly accessible. If you invest your emergency fund in CDs, mutual funds, or the stock market, your money is not quickly accessible to you as if it were in cash. In addition, the stock market goes up and down on a regular basis. If you have your money in the market, you may need to access it when the market is way down and you may not have enough to cover your emergency.
Your emergency fund should not be invested in a CD, Mutual Fund, or the Stock Market because it needs to be quickly available. An emergency fund is an insurance policy that does not make you money.
How To Replenish Your Emergency Fund
If you are forced to dip into your emergency fund to pay for an unexpected expense, you should immediately go back to paying the minimum on all our outstanding debts. Just as you initially funded your account, you should divert all extra money to your emergency savings until it is fully funded again. Once it is funded, you can continue on your debt repayment plan and other financial goals.
The idea of the emergency fund is to avoid putting anything on credit cards. The use of credit cards can quickly put you in a downward financial spiral that can be difficult to get out of. With a 16% minimum interest rate on most cards, the amount of interest you will spend to catch back up is unacceptable. Avoid giving your hard earned money away because you didn’t prepare for life with an emergency fund.
Replenishing your emergency fund should be the “emergency.” Protect yourself as soon as possible to keep your head above water financially.
How Can I Save A Lot Of Money In A Short Amount Of Time?
Most of us wish we had more patience, especially when it involves reaching our goals. I am no different in this aspect because I am currently trying to pay off my house. I wish it was paid off tomorrow but unfortunately, I still have a year and a half or so. With that being said, I find it much easier to work extra jobs and spend less money when I have a goal I really want to achieve.
I routinely work one or two extra jobs each week to help me achieve my goal much faster. I also avoid spending money when I can because it’s amazing how much I spent on “junk.” By being intentional with my money, I have been able to take a huge chuck out of my mortgage in a relatively short amount of time.
I recommend you pick up a side hustle and also check out my ultimate guide to save money found here: The Ultimate Guide To Save Money!. I also use cash back apps to get money back on the purchases I do make: My Favorite [Top 3] Cash Back Apps For 2019.
By controlling your spending and increasing your income, you will achieve your financial goals much quicker. Once you start the ball rolling, it is amazing how quickly you can fund your emergency savings!
My emergency fund has saved me numerous times. I have been able to avoid using credit cards for unexpected expenses for quite a few years now. Do you think $1,000 in your emergency fund is enough like Dave Ramsey recommends? Comment below, I’d love to hear your thoughts!
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An emergency fund is a separate bank account you have that is only used for emergencies. It is a fund that sits dormant in the bank and is only used if you are in a crisis that needs money to fix. An emergency fund is “personal insurance” to protect you from unexpected life expenses.
If you currently do not have an emergency fund, this should be your number one priority. You should fully fund your emergency savings before you start paying off debt. Without it, you are vulnerable to plunge even further into debt.
You should not invest your emergency fund. This money needs to be readily available in the case of an unexpected expense that you can not pay for out of your regular income. In short, it is an insurance policy that does not make you money.
Properly funded emergency savings should have $2,000 in it to protect you against life’s unexpected financial emergencies.