How and Why to Start an Emergency Fund

An emergency fund is a readily available stash of money that protects you during tough times, in case of loss of income, or unexpected emergency expenses.

We all need an emergency fund, a cushion of cash to protect us during financial rainy-days. Without a rainy-day fund you are one job loss or car repair away from disaster.

I’m pretty sure you already know that you should have a rainy-days fund to keep you afloat when times are tough. But do you believe that you can do it? Keep reading and you’ll see that it’s not so difficult.

The rule of thumb for the amount you should keep in your emergency savings is three times your monthly expenses.
So add up you essential expenses for the month, including rent/mortgage, food, car payments, childcare, groceries, utilities, etc. Take the total and multiply it times three. The resulting amount is your goal. If you typically spend $3,500 a month, you're goal will be $10,500.
If you feel like the resulting sum is enormous, don’t worry, all you need to do is start small. Even the ocean is made of drops!

If you are able to save more than three times your monthly expenses, great. Do it! In this case you don’t need to keep the whole amount readily cashable; you can invest the surplus in longer term investments with a higher return than the average money market account.

You can think of your emergency savings as your sleep-well-at-night fund. Financial stability can be threatened by many causes, and the family that depends on it can find itself upside down financially in few weeks.
Once you have saved enough, you can feel secure that your family is covered in case a paycheck disappears, or other dreadful episodes happen.

How much you need to save to be able to sleep well at night is quite personal. The minimum recommended is three times your monthly expenses, but some people, like my husband, would still worry, even with that amount. His goal for the security cushion is a non-defined “as much as I can save”. So it’s really up to you how far you deem necessary to grow your emergency fund before you can use the money for unnecessary purchases.

Make saving part of your budget, treat it like a bill. Every month, pay yourself first, transferring from your checking account to your rainy-day account. It helps scheduling this transfer in automatic, in case you forget or …change your mind.

Start saving 5% of your paycheck until you reach your goal. At the end of the month, if you have extra money in your checking account, transfer it to your rainy-day account.

If, like most people, you leave paycheck to paycheck, it might seem impossible to even get started to save the first drop of the ocean. You may think: I will never make it to have 3 times my monthly expenses saved, why even try?

It does not have to happen right away. Hopefully you won’t have a big emergency any time soon, so you have time to get ready for one in case it comes. And if it happens too son, well at least you’ll have something set aside to help you afford it.

To get started, temporarily give up something important but not essential. For a period of time sacrifice some luxuries that you got used to, like premium cable or dining out. It will help to know that it’s only temporary. Then look for ways to cut corners on everyday expenses.

Keep the money you save in a separate account, where you don’t allow yourself to dip for any monthly expenses or non-emergency purchases.

With interest rates as low as they currently are, you don’t need to focus on the return rate, but make sure you money is safe and accessible. A money market account in a sound credit institution will work.

If you already have a money market account where you stash money for vacations, gifts, etc., those are not emergencies: you need to open a new account for your emergency fund only.

To understand what can be consider a real emergency, you have to consider the consequences if you don’t take care of it.
A real emergency threatens your survival or your health, not just your desire to be comfortable.
It’s a real emergency if your family is about to go hungry or be thrown into the street. It’s not a real emergency if you are the only one of your friends that does not have a 3D TV.

Remember the rule: if it’s not an emergency, you cannot use the rainy-day fund. No exceptions allowed.