The Real Reason why you need an Emergency Fund
Let’s talk emergency funds. I’m sure this is not the first time you’ve heard that you should have some rainy-day money stashed away, but let’s get real.
Why do you really need an emergency fund and how much do you actually need?
First, let’s talk about why. Duh, for emergencies right? Not exactly.
Emergencies are going to happen whether you have money for them or not. The reason you want an emergency fund is so those emergencies don’t cost you more money!
That’s right. The purpose of an emergency fund is to save you money.
Think of your emergency fund as a source of income. It’s making you money by being there when you need it.
If you have to hit up a payday lender, title loan, or use a credit card to cover your emergency expense, it’s going to cost you more money.
The average interest cost of a small short-term loan is over $35. That’s money you don’t want to spend. That’s $35.00 lost.
If you think an impulse purchase at the mall is a waste, at least you get something for the mall purchase.
That $35 in interest you had to pay to get your car fixed…. you got nothing to show for that cost. That’s $35 wasted.
With an emergency fund ready to cover the cost of that car repair. You save $35 or more in interest charges. Money saved is money earned!
Now, let’s talk about what counts as an emergency. This is an emergency fund not a vacation fund. 😃
Here’s the simple rule you should follow:
If you have a choice, it’s not an emergency.
The money in your emergency fund can only get used when you have no choice.
When your car breaks down and you need it to get to work. You don’t have a choice. That’s money you HAVE to spend. That’s an emergency.
If you suddenly lose your job or have your hours cut. Then your rent and bills are an emergency. You don’t have a choice. You have to pay your bills.
Any expense where you have a choice of whether or not you want to spend the money, that’s not an emergency.
If you want some new clothes for summer… not an emergency.
If your friends or family are going on a trip and you want to go too…. not an emergency.
If your dishwasher is acting up…. not an emergency.
You have a choice of whether or not you want to replace your dishwasher right now. You only use your rainy-day fund when you truly have no choice.
If there is a way to put off the expense or find an alternative solution. It’s not an emergency.
So how much do you need in your emergency fund?
You want the quick an easy answer? More than zero. If you have more than nothing, you’re way ahead of most other people. Start there.
The Federal Reserve reports that almost half of American Adults have less than $400 in savings.
Even $200, would put you way ahead of most other adults. So just get started. Don’t waste too much time right now worrying about how much.
More than zero. That’s how much. Get started saving.
Build a regular habit of adding some money to an emergency fund, even if it’s just a few dollars each week . Then, you can spend some time figuring out the right emergency fund for you.
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