Financial Article 2 - Liberty First Credit Union

Financial Article 2


The Importance of an Emergency Fund

Financial Wellness
Financial Wellness

If you had a dire emergency, and needed to come up with $400 right now, could you do it? About half of Americans can not.

So it begs the question, why not? Today, I want to tackle that question and, also, find out, what exactly is an emergency fund? 

Many banks and financial experts will readily suggest that you keep at least three-to-six months worth of your monthly living expenses in a savings account that’s easily accessible. This money will be earmarked for emergencies only.

When many people hear 3-6 months of expenses, they commonly think that means 3-6 months of income. That’s a bit of a mistake, though. Remember, it’s 3-6 months of expenses, not income. You only need what you can live off of for a few months of a no-income time period. 

Some of you may find this a bit extreme, but the reason more and more people are making emergency funds a top financial priority is simply because they are realizing this: life happens. 

People lose jobs, unanticipated expenses come up, especially in these uncertain times. Being prepared for the unforeseen will likely be your best defense when you’re in a crunch. It can be the difference between enduring a temporary dilemma or going deep into credit card debt and potentially creating a long lasting negative impact. 

It will be the foundation of your entire financial health. Because, although no one wants to have those annoying, unexpected expenses, they are bound to happen to all of us at some point or another. 

I like to think of it as an insurance policy for my other financial goals. Instead of paying a company, I’m paying myself with cash that I can easily access in times of crisis, as opposed to needing to dip into the money I have been saving for other things.

This is obviously not the most exciting thing to be saving for. It’s not as much fun as saving for a house or a vacation, but it is so crucial and will aid you in reaching your other financial goals. 

So how do you go about saving for this elusive emergency fund?

Well, the first thing you need to do is figure out what your monthly expenses typically look like. If you have a monthly budget, you can use that for reference. Once you figure out how much your essential living expenses are, you can then determine exactly how much you will need to save in your emergency fund.

After you have established that number, create a goal and a timeframe of when you intend to reach that goal. Determine how much money you will realistically be able to add to the fund every month, and stick to it until you reach the amount you need in your fund. This money will be super helpful to you one day. 

Me, I actually got into a pretty bad car accident a few months ago. Now, I sell solar for a living, and this particular industry involves a lot of driving, as we meet with clients in their homes. My car accident left me unable to drive for a few weeks, and being unable to drive meant I was unable to work. Because I had built an emergency fund in the months before the accident, I was able to take the time to deal with my insurance claim, and comfortably get back into driving at my own pace. Without that money set aside, it likely would have been a whole other stress on top of everything else. 

Having that sense of security during difficult and uncertain times is extremely helpful. 

A few things to keep in mind: 3-6 months of savings is ideal, but even ‘some’ savings are always better than none. If saving for three months of expenses isn’t doable for you right now, start with one month, and continue from there.

On the flip side, if you are the kind of person who likes to err on the side of caution, your fund can be for 9 months… or 12 months. That all depends on where you are financially, and what you feel comfortable with.

Something else I would recommend doing monthly is taking inventory of your expenses. As time goes on, expenses change. Maybe you don’t use that gym membership anymore, or maybe you got a new pet and now have some new monthly expenses, like vet visits.

Another thing to keep in mind is to have self-control with that money. When you have a couple thousand dollars sitting in reserve, it’s easy to talk yourself into buying extras, like something you suddenly want, but don’t need. Like a vacation, designer clothes or accessories. 

Make some rules for yourself on when you can use your fund and exactly what defines an emergency. Some examples can be unexpected medical challenges, periods of unemployment,  unanticipated vehicle repairs… not a vacation to Bali. 

Remember, you may really need this money someday, so invest in yourself, invest in your future, and take these necessary steps toward living a life of financial security!