Emergency Savings & Emergency Fund Dos and Dont's

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 been priority #1. With other financial goals like saving for a down payment on a house, sometimes I skipped building my rainy day fund. And so, my emergency savings fluctuated. There were times when I barely had any reserves. Those days, I prayed that life wouldn’t throw me any more curve balls.

But in this new chapter of my life, as I commit to building my wealth, I also have to protect it.

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.

So what is a financial emergency?

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

Emergency Fund Expenses

  • Loss of job
  • Medical and dental
  • Home repairs
  • Unexpected travel for illness or death
  • Unforeseen tax bill
  • Funeral costs
  • Emergency pet care etc

Emergency Fund Don’ts

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 etc

Expenses To Watch Out For

Home Repairs

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.

So avoid dipping into your emergency savings for expenses that you know you’ll have to incur at some point. Remember emergency funds are 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.

Car Repairs

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 like me), save for them.

Every year I spend about $2,500 on car maintenance and repairs. Anything outside of this would certainly qualify as an “emergency”.

If you plan to buy a new car, consider using CD laddering as a way to help save.

Tax Bill

As much as we love getting 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 business bank accounts – one for income and another for taxes.

Tips To Manage Your Emergency Fund

Start Somewhere

Financial experts suggest having 3-6 months worth of expenses available in your emergency fund. In case you lose your job, you can survive for a few months before finding a replacement. I get the rationale but is it practical?

For most people, this means saving thousands of dollars on top of bills and other competing financial priorities!

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 reserves.

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 goal. Your emergency savings are about you, so do what you feel will work for your unique situation.

Auto Save

Lastly, grow your rainy day fund by saving often.

I save $25 towards my emergency fund bi-weekly. 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 my financial priorities. You see I like to keep one foot in the door without overcommitting.

If $25 is too high or too low, how much you can afford to miss? Automatically save that amount regularly.

Do you follow any emergency savings rules? Share your thoughts below!

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