The importance of an emergency fund

We are not to judge thrift solely by the test of saving or spending. If one spends what he should prudently save, that certainly is to be deplored. But if one saves what he should prudently spend, that is not necessarily to be commended. A wise balance between the two is the desired end.
~Owen Young

I know a lot of people (including my parents) who are flying by the seat of their pants financially. They spend as soon as they get it and have no savings or emergency fund. Which strikes me as silly. I’ve had an emergency fund for years. It’s a thousand dollars, at least, and it sits happily in my savings account doing absolutely nothing. The only times I ever touched it where when I used it temporarily to pay off my student loan that much faster, and when I was unemployed for two months. I’ve “borrowed” from it to fix financial mistakes like overdrafts and the rare “Oh god I don’t have money for gas, the tank’s on E and I don’t get paid for another three days.” I pay it back immediately.

My emergency fund is the most important thousand dollars I own. It exists in case I lose my job, get hit by a car, have an emergency vet bill, or other such crappy things. It may not cover the full extent of the damage, but it’s a start. It’s also good for those stupid minor financial mistakes mentioned earlier…it allows me to be more flexible with my finances.

Once I’m free of debt I intend on increasing it to five thousand dollars…enough money that I can cover or take a sizable chunk out of any emergency. Oh, it’ll be tempting to spend it, at first. That’s the hardest part of an emergency fund…training yourself to act as if it doesn’t exist. Five thousand dollars is a lot of money and could take me to fun places. But I’ll be better served keeping it around just in case. Five thousand dollars can cover close to six months of unemployment for me, easily (not that I’m likely to get fired anytime soon).

“But Fox, you could invest that five thousand dollars and make money off of it!” No. The emergency fund needs to be almost immediately accessible. I’m not interested in playing the stock market and most other forms of investment I’m aware of would leave me either taking a penalty or waiting around for the bonds to sell. The most I’d want to do is wait for the bank to open so I can transfer the money over should I be without internet. Investing is well and good, but this is something else.

An emergency fund is not a savings account, although a savings account can double as extra emergency funds. As I mentioned before, I have in the past and will in the future use it to pay off debt that much faster, but that’s it. Once the debt is paid off, the fund gets reimbursed as soon as possible. My emergency fund is not and will not be used for going on vacation, buying things, or other such crap. If you have a savings account, great! They are good to have. But do you have something set aside for an emergency, or is it all going to be spent on that road trip you’re planning on taking?

How to start an emergency fund:

Start saving. This may be hard if saving isn’t something you do automatically. Start small if you have to. If you get a raise, pretend it didn’t happen and stuff all that extra money into the savings account. Put $10, $20, $50, or $100 away each paycheck, raising it as you become accustomed to saving. If you’ve got an employer that does direct deposit, it may be possible for you to split your paycheck up between accounts so you don’t even see the money. Even if you don’t, mentally subtract your savings from each paycheck…consider it a bill that must be covered just like the rent/mortgage and the utilities. My credit union allows me to split my deposit using one slip, meaning I can immediately deposit money into my savings without it ever hitting my checking account.

Decide how much you need to have in the fund. Mine’s been a thousand dollars for a while now. I don’t make much money and most of what I’ve been making has been going into getting rid of the debt…just as important as an emergency fund. But once I’m out of debt, there’s no reason why I should add to it further, especially as I’m without health insurance.

And then don’t touch it. That’s the hard part. I’m pretty good at this, so I keep my emergency fund and my savings account together. People who have a harder time keeping their fingers out of their monies may need to start up a separate emergency fund account (possibly with another bank).

What’s an emergency?

Not a pair of shoes on sale for half off, that’s for sure. Emergencies are those massively expensive things that cost a lot of money that you don’t foresee coming because you wouldn’t ever want them to happen. Getting fired. Breaking your arm. The car getting totaled. Coming home to discover your cat has vomited blood all over the floor. House fires. Hurricanes that send a tree crashing down on your roof. Unpleasant, expensive things. NOT SHOES.

That’s your homework, class. Start an emergency fund if you don’t already have one. If you already have one, consider adding to it.

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2 Responses to “The importance of an emergency fund”

  1. Dargon Says:

    I can not agree more. My emergency fund saved my ass when I got laid off back in 2009. If it weren’t for the 3k it had at the time, I would have not had sufficient funds (even with the unemployment) to last the six months until I started back at school.

  2. One method I use to keep an emergency fund that I don’t touch is to make a savings account that I don’t usually see. Currently that’s at the online bank ING. At other times I’ve used a separate savings account *THAT IS NOT LINKED TO A CREDIT OR DEBIT CARD* at my usual bank.

    This isn’t for everyone. This actively doesn’t work for my husband, for example; he wants the “emergency” money to be in his day-to-day account.

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