Hi, I’m Carrie from The Tightwad Teacher and today I’m going to share with you why you need an emergency fund.
The feeling of security that comes from having an emergency fund is priceless. Life throws us curve balls all the time and we must be prepared for them. If you don’t have an emergency fund, what would you do if your refrigerator broke? What if you lost your job? What if your roof started to leak and you needed to replace it (This is what happened to us in October)? If you don’t have the money to cover these surprise expenses you end up having to borrow the money.
Society tells you that it is just fine to borrow money. Everyone borrows money and everyone is in debt so it is ok! What they don’t tell you is when you borrow money, usually there are strings attached such as a high interest rate. If you take out a loan, then you end up paying more in the end, which no one wants to do. My husband and I usually wait until we have the money saved before we make the repairs (if they can wait that long and are not an emergency). We try to avoid borrowing money at all cost!
So how much money do you need to put into an emergency fund?
It is recommended that you have enough money in your emergency fund to cover three to six months of living expenses. That amount will be different for everyone and it may not be feasible to have that much in your emergency fund in the beginning, but that is a goal to work towards! On top of trying to establish an emergency fund, most people have some sort of debt they are paying back as well. This could be mortgage payments, car payments, student loans, credit card debt, etc. Establishing an emergency fund is a slow process so be patient!
So how do I start an emergency fund?
Well here is how my husband and I started ours (we don’t have near the amount we need due to the leaky roof I mentioned earlier, but we are trying to build it back up!).
My husband and I don’t have any debt right now besides a mortgage payment and two small student loans that we could pay off right now if we wanted. When we started our emergency fund we had a car payment. We made sure to pay the minimum amount on our debt and then put whatever we had left in savings to start our emergency fund. If you can get your emergency fund to $1000 in the beginning that is awesome! That was our initial goal and once we reached that target amount of $1000, we started making extra payments on our car to get that debt gone. We ended up paying off a five year car loan in two and a half years! Once we did that, we took the money we were putting aside for the car payments and started putting that in our emergency fund. We were used to not having that money to spend, so it went straight to our emergency fund. The key is not to spend that money elsewhere. Put it straight into savings since you are used to not having it to spend anyways! When you pay off debt and put that money towards your emergency fund, you will build one up in no time!
Is an emergency fund the same thing as a savings account?
An emergency fund should be a separate account from your savings account? Why? An emergency fund is ONLY to be used during an emergency. That money is not to be taken out for anything that is not an emergency. You should be putting money in and not taking any out. If you run out of grocery money or fun money for the month, that is not considered an emergency so don’t touch it! Your savings account should contain money that you are setting aside for the future. For example, do you know you are going to need a new car in the future? Go ahead and start planning on that and setting money aside for a new car (so that you don’t have borrow money and pay car payments). My husband and I have a separate account for savings and our emergency fund. It makes it easier to keep the money separate and not take money out of the emergency fund for something that is not deemed an emergency.
Get started now!
There are too many people who are not planning ahead for life’s curve balls. Be a good steward and plan ahead for those unpredictable expenses. Thank goodness we had (notice I said had) an emergency fund because between a roof replacement and having to remodel an entire rental property (due to tenant not taking care of it) all within a four month time period, we were able to take care of all of that without having to borrow money. In today’s society, that is a huge accomplishment. Of course our task now is to build it back up for the next time we may need it!
Don’t let society make you think it is ok to borrow money because nothing in life is free and you will have to pay it back…………..with interest.
Carrie is a high school teacher, wife and mommy of 2 toddlers. Her blog, The Tightwad Teacher, covers teaching tips, resources and strategies. You can find her on Twitter, Facebook, Pinterest, Google+ or Instagram. Check out her blog at thetightwadteacher.com.