We have never lived in a time where the benefits of an emergency fund were more obvious.
If you are one of the many people out there who don’t yet have one of these financial safety nets, fear not! With a little elbow grease, you’ll have your very own in no time. And, if you are one of the millions of people who will soon be receiving a stimulus check, you’ve already got a leg up!
Why You Should Have an Emergency Fund
Whatever the type of shit that hits your particular fan, having money in the bank makes the vast majority of life easier. In this day and age, anything is possible. Knowing that you can cover your expenses for a while no matter what is one of the best psychological benefits I’ve ever experienced.
What is an Emergency Fund?
An emergency fund is typically at least 3 months worth of expenses. You can adjust this based on your personal risk tolerance, although I wouldn’t recommend ever having LESS than 3 months worth of expenses.
I’ve gotten more and more conservative with my cash-on-hand over the years. Before beginning my sabbatical last year, I set aside about a year’s worth of expenses in cash. I did this because neither me nor Mr. Hippie were expecting any earned income for at least 6 months. Beyond that period, as we all know, finding a new job can be quite tedious, and I wanted a cash cushion to weather it.
Where to Find the Money for an Emergency Fund
If you don’t presently have 3 months of expenses in cash, you have 2 options within your power for finding the money. You can earn more through raises, a new job, side hustles, etc. Or, you can cut your expenses and set aside more of your incoming funds. Here are a few articles I’ve written on reducing expenses via cutting insurance coverage, reducing transportation costs, and reducing consumerism.
Of course, the quickest way to burn down a candle is to light it at both ends. Consider trying both approaches to maximize your results.
If you don’t have plans for your stimulus check right now, consider throwing it in with your e-fund.
In airplanes, flight attendants always remind us to put on our own oxygen mask first. Apply this principle to your personal finances by covering your bases before anything else.
Where to Put Your Emergency Fund
I’m instituting 2 rules for where you park your fund.
Rule 1: Thou shalt be able to access thy emergency fund immediately
Put your money somewhere you can access it immediately if you need to use it! If disaster strikes and your e-fund is in a CD, bonds, your Roth IRA, or the stock market (seriously, don’t do this!) — it’s of no use to you until you can make the transfer to your account, which can take days or even weeks. Worse yet, you might be locking in a loss AND creating a taxable situation you hadn’t planned for if it’s in bonds or the market.
If you consider your Roth IRA your e-fund because you’ve read a little bit about this magical unicorn account, let me be the first to urge you to keep all those ponies in that yard. Once you get funds in that account, you do not want to start draining it until you begin your retirement withdrawal strategy. Keep that money where it belongs! Making more money to keep working for you.
Many people think a CD is a good place for their e-fund, but you will often be paying a fee to access your money if the term of the CD isn’t up yet. Plus, any interest that had accrued during the term will be moot, meaning you would have been better off just letting that money simmer in a savings account.
Rule 2: Thy emergency fund must be earning more funds
This brings me to Rule 2. Put your e-fund where it can earn interest! Get that money out of your mattress and dig it up from your backyard asap! If no one has told you this, there are banks out there that offer completely free accounts and pay you for the privilege of storing your money. Keep in mind that bank interest rates are not high and will likely not even keep up with inflation. But, banks keep your money FDIC insured and liquid so they’re still one of the best places to store this particular fund.
I have kept my emergency fund in a high interest savings account with Ally for the past 8 years or so. I have used them because their interest rates stay competitive, I have never incurred a single fee, and their customer service is wonderful. Last year, my rainy day money earned about $335 with them with interest rates hanging out at about 1.8%. Had I put it with most other banks, I probably would have earned a few dollars in interest that would have subsequently been eaten up by fees for not using the account.
Ally also recently introduced a feature that allows you to divvy up each account into different “buckets.” I dig this because it enables me to categorize my money for specific purposes without having to open a new account.
Thanks for reading and I hope this inspires you all to top off or begin your e-fund!
Food for discussion: How many months worth of expenses will you keep in your emergency fund? Where will you store it?
3 thoughts on “How to Build an Emergency Fund”
Totally agree with rule Number 1. I was watching a Youtube video the other day where the person had her emergency fund in an account that took “two days” to transfer to a checking account. It was to STOP her touching the “savings”. But two days is really impractical for an emergency fund.
Hey Shonny! Thanks for reading and commenting! I couldn’t agree more than 2 days is completely impractical. When an emergency happens, here are plenty of times when you need the money immediately. I learned this mistake the hard way and it’s a lesson I only needed to learn once!