Everything You Need To Know About An Emergency Fund
Do you have enough money set aside in case of an emergency?
If you're like most Americans, odds are you don't. A survey conducted by GoBanking in 2016 suggests that nearly 7 in 10 Americans have $1,000 or less in their savings.
This is frightening and disheartening, because as we all know, shit happens.
Like the air conditioning stops working in the middle of a heat wave. Or your new puppy swallowed plastic and now it's blocking his intestines. Without surgery, he will die (true story - as a puppy, Wilbur ate part of a hose. $3,000 bucks later, he's had a long and happy life).
It's especially important to have an emergency fund once you become a homeowner - you have to plan on things breaking around the house. Because they do. Like all the time. And as a dedicated pet owner, you have to know that you can cover the costs of taking care of your little critter.
Having an emergency fund allows you to be prepared for the inevitable thing that goes wrong.
Listed below are some common questions about emergency funds:
Should you have an emergency fund if you are in debt?
Yes, you should still have an emergency fund, even if you have debt. If you have debt, then the usual recommended amount is to have $1,000 in your emergency fund before you start paying down your debt.
After that amount, you need to determine what you are comfortable with. Most would agree that six months of living expenses is a good target. But it all depends on your situation and comfort level.
When the economy tanked in 2008, we had a year's worth of expenses in our emergency fund, but it turned out not to be enough.
How much should you keep in an emergency fund?
If you don't have debt, then you should aim for at least six months of expenses.
For us, I like to have one year of expenses saved I am self-employed, we own a house, and we are both in our fifties. As you get older, you have to consider the costs of medical treatment, even if it’s just co-pays.
There are many reasons for why a person might need money fast, and you need to analyze your specific situation.
Where should you keep an emergency fund?
Your emergency fund is there so that when you need money fast, you can use it. Due to this, you will want to put your money in a place where you can easily take it out. This means you do not want to be penalized for taking the money out and you probably don't want to invest it in a high risk investment because you don't want to lose it either.
I prefer keeping an emergency fund in a low risk savings account, such as any basic savings account that you will find at a bank. This way it is easily accessible in case anything were to happen, you can access the money quickly.
How can I save enough money to fully fund my emergency fund?
It may be hard in the beginning to start saving for your emergency fund, but everyone has to start somewhere and it's always best to be prepared for when you need money fast.
You can save money for your emergency fund by setting out a certain amount out of each paycheck, or you can work towards making extra money so that you can build up your emergency fund even quicker.
Do you have an emergency fund? Why or why not? How much do you keep in it?