My emergency fund has saved my hide more times than I can count. From car insurance payments to overdrafts, I’ve relied on my emergency fund to get me through sticky situations. Yet setting money aside for those “just in case scenarios” hasn’t always been easy. And although I’ve known that having reserves is very important, it certainly hasn’t always been a priority.
With other financial goals like saving for a down payment on a house, sometimes I skipped building my rainy day fund. If I’m being honest, there were times when I barely had any reserves at all. Those days, I prayed that life wouldn’t throw me any curve balls. However, what I’ve learned is that when used properly, an emergency fund can keep financial uncertainty at bay. With an emergency fund, you don’t have to rely on savings, liquidating investments, credit cards or short-term payday loans. Nonetheless, if you have to pursue credit, don’t fret. Only borrow what you need and work on paying it off quickly.
With that being said, here are some dos and don’ts when it comes to having an emergency fund.
Emergency Fund Dos
- An emergency fund is for unexpected and urgent expenses
- Keep funds in a separate bank account
- Access funds easily with a checking or money market account
Types of Emergency Fund Expenses
- Loss of job
- Unexpected medical and dental (If you can, use a flexible spending account)
- Unplanned home repairs
- Unexpected travel for illness or death
- Unforeseen tax bill
- Funeral costs
- Emergency pet care
Emergency Fund Dont’s
An emergency fund should not cover the following expenses.
Types of Non-Emergency Fund Expenses
- Property tax
- Car repairs
- Car insurance payments
- Spontaneous trips
- House down payment
- Pay off credit card balance
- Holiday gifts
- Vet visits
Top Expenses to Watch Out For
Avoid using your emergency fund for home repairs.
Let’s say your roof needs replacing within the next year. Would you be surprised if it starts leaking before then? No, right? Avoid dipping into your emergency savings for expenses that you know you’ll have to incur at some point.
Remember an emergency fund is for unforeseen expenses (something that you had no idea would happen). Because we can expect some (but not all) home repairs, save for them. Set aside money for home repairs and maintenance costs in a separate bank account. This way at least you’ll have a safety net to rely on. Raid your rainy day stash for anything that surpasses what you expected.
Since cars need routine maintenance, account for car repairs in your budget. Again, although these expenses are urgent, since you can predict them at least once a year (or more if you have an old Nissan), save for them accordingly.
Every year on average I spend about $2,500 on car maintenance and repairs.
Anything outside of this would certainly qualify as an “emergency”.
As much as we love getting tax refund checks, sometimes we end up owing Uncle Sam a lot of money. When you have to pay an unexpected tax bill, by all means, use your emergency fund. This is what your savings are for.
However, if you own your own business or freelance, account for taxes. Rule of thumb, set aside 25-30% of your earnings. To keep track of both your earnings and taxes, I suggest opening two separate bank accounts – one for your income and another for taxes.
Tips to Better Manage Your Emergency Fund
Financial experts suggest having 3-6 months worth of expenses available in your emergency fund.
What’s the rationale?
In case you lose your job, you can survive for a few months before finding a new job. I get the rationale but is this practical? For most people, this means saving thousands of dollars on top of bills and other competing financial priorities which can be tough.
But here’s an alternative. Instead of overwhelming yourself, start with a savings goal of at least $500. Commit to having at least $500 in your rainy day fund. If you can save more, double it – save $1,000 for unexpected emergencies.
I’ve found that since most of my urgent and unexpected expenses cost less than $500, this works for me.
Better yet, figure out how much you need to feel financially comfortable and set that as your financial goal. Your emergency savings are about you, so do what you feel will work for your situation.
Lastly, grow your rainy day fund by saving often.
I save $25 towards my emergency fund biweekly. Since $25 is such a small amount, I don’t notice it – which is the point.
This means that at the end of the year, I effortlessly saved $600 for emergencies all while focusing on all my other financial priorities. If $25 is too high or too low, how much you can afford to miss? Automatically save that amount regularly.
Alternatively, save your spare change by signing up with Digit. Digit is one of my favorite micro-saving apps.
Need helping carving out some money to put into your emergency fund? Join my free REVIVE Your Budget Challenge to get clear on your goals and learn how to save more.
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Danielle Desir is a financially savvy traveler, 5x author, and podcaster. She paid off $63,000 of student loan debt in 4 years, bought a house at 27, and has traveled to 27 countries. She refuses to let her financial responsibilities hold her back from living life on her terms. Listen to The Thought Card Podcast here.