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Emergency funds tend to be a controversial topic in the finance community.
There is no right answer, but there are a lot of opinions around how much you should save in an emergency fund.
How Much Should You Save?
As I said above, there is no right answer. The amount will look different for everyone.
Here are a few things to consider when deciding on an amount:
The stability of your income (and number of income sources)
Recently, we have really learned that many jobs are not as secure as we thought they were. A standard 9-5 career does provide stability, but it is not 100% secure.
However, there are some industries and companies that are less secure than others. If that is the case for you, you’ll probably want to have more saved up in case you do lose your job.
Creating multiple streams of income is also a great way to increase the stability of your income.
If you have children/dependents that rely on your income
There is no question that having children costs more than being child-free. When you have dependents you not only have to save for emergencies for yourself, but for them as well.
With that people said, it would be ideal to save at least a couple thousand extra per child.
The same goes for pets!!
Your previous emergencies
Take a look back at emergencies you’ve had in the past and how much those cost you.
For example, recurring emergencies I have experienced relate to dental work. Each time one of these emergencies came up, it cost me $1,000+.
Now I’ve switched to a better insurance plan, but that just goes to show that $1,000 as an emergency fund is just not enough.
The most expensive things you have/own
If you own a home, then you probably need to have a higher emergency fund since you are responsible for making any repairs or replacements.
The same goes with having a car. The amount you save is also dependent on how old your car is, the type of car you have, and how well you care for it.
If you take all of these things into consideration and you’re still unsure of how much to save…I suggest starting with enough savings to cover one full month of expenses (at least). Then from there, continue to save more every week and/or month.
Another Reason to Get Out of Debt
The less expenses you have, the less money you need saved.
Or put another way: The less expenses you have, the further your money will stretch.
For example, I recently paid off my car which had a minimum monthly payment of about $383. Now if anything happened to my income, I wouldn’t need to use $383 to keep my car. I could instead use that money to pay part of my rent or a couple months of groceries.
How Much is in My Emergency Fund?
In 2020, I decided I wanted my emergency fund to reach at least $3,000. I reached that amount by mid-year by prioritizing saving. After that, I continued to save each month ($100-$200) and I now have about $4,500 saved (March 2021).
My goal for 2021 is to reach $6,000, which would cover about 2-4 months of expenses for me. Eventually I would then like to save 1+ year of expenses (over $40,000).
Where Should You Put Your Emergency Fund?
I strongly suggest saving in a High Yield Savings account.
These accounts aren’t very “high yield” now, but at least you can earn 0.5% or so on your money rather than 0.01% in a regular bank.
I keep mine in my Marcus by Goldman Sachs account which is currently earning me 0.7%. If you use my link to open an account with them you will earn 0.2% extra over the current rate for 3 months!
When Should You Use Your Emergency Fund?
When you have emergencies, duh right?! Not necessarily.
I don’t use my emergency fund unless I ABSOLUTELY need that money.
For example, recently one of my dogs had to go to the vet a couple times unexpectedly. Fortunately, this only cost a couple hundred bucks and split between my sister even less for me.
I can easily cash flow $100-$200 so that is exactly what I did.
Even if something came up that cost $1,000+, I would cash flow if I can.
Yes that means I wouldn’t be able to make as much progress on my debt and/or savings, but in my opinion this simplifies the process. Then you don’t have to worry about replenishing the lost savings and you can maintain a higher amount in your HYS account and keep earning more money 🙂
If you don’t have enough money to cover an expense, then absolutely pull from your savings.
You’ll notice that the further along in your financial journey, the easier it is to save money and come up with money when necessary. This has been my experience anyway.
I have my emergency fund (which holds the largest amount), but I also have sinking funds for car maintenance, medical/dental, and many other things that I can use for those specific categories OR if I absolutely needed more cash.
I highly recommend sinking funds, you can learn more about them here.
A Little Bit of Encouragement
For anyone who is struggling to save up an emergency fund, I know your struggle. I’ve been there, may of us have.
Each time I saved up a few hundred bucks, something would come up and deplete it all. Many times I would actually have to go into further debt by charging those things on a credit card!
In the beginning it can be tough, but it will get better. Keep on working on it and I promise you it will get easier!!