You might like to know that you’re not alone in this question. According to Google over 27,000 people are searching for “what is an emergency fund” each month. I personally know some that should be searching. Sadly, many 40, 50 even 60 year olds have no savings set aside.
Simply put, an emergency fund is a pile of money set aside to sustain you through unexpected circumstances.
The history of my own emergency fund
Here’s how I came to believe in the importance of having an emergency fund. Years ago I found myself in my boss’s office being yelled at. Literally yelled at. I don’t even remember now what the reason was. What I do remember is that I went back to my office and contemplated quitting on the spot. At that time–with a family and mortgage and no savings built up–I felt trapped. I didn’t feel that I could quit and be okay for a few months while I looked for another job. I told my boss the next day that I would have quit if I had the money and if he ever yelled at me again, I’d be in a position to leave. Then I started saving. That feeling stayed with me. I never wanted to feel trapped again.
I didn’t instantly have a stack of cash, but now I had motivation and slowly built up a protection against feeling trapped. For the past few years, I’ve kept at least a year’s worth of savings close by in case my job and I get separated.
What an Emergency Fund is NOT:
New car fund. Having wheels is not unexpected and you should be saving up for your next car in a separate account.
Trip to Vegas fund. Start a separate savings fund for vacation and fun money.
What an Emergency Fund IS:
An emergency fund is a cushion of cash to protect against:
- Loss of job.
- Injury, hospitalization, etc.
- Repair of vehicle or house.
How much should be in an Emergency Fund?
That depends on your personality and circumstances. How stressed will you be if your refrigerator stops working tomorrow? How will you respond if you lose your job? How quickly will you be able to replace your income?
I can only answer for me and tell you that I sleep better at night knowing I have a large cushion that will catch my fall from different angles. I also speak up when I need to at my job knowing that if I lose my job my family and our lifestyle will not suffer at all. That reduces stress knowing that I have over a year to replace the family income.
I would encourage EVERYONE to make this a high priority in your financial planning. It’s been a huge step in my financial freedom lifestyle.
Any questions about Emergency Funds?
What percentage of your income did you stash in the E-fund when you first started?
Seth, As much as I could to pay down debt and begin socking away at the same time. Even a month of living expenses saved up gives peace of mind. I’ve always (the past 15 years) tried to live off just my main paycheck and use any extra income (ebay, consignment shops, tax biz, second jobs, commissions, bonuses) to attack debt and build funds up.