Today we want to chat about your emergency fund! First thing’s first, an emergency fund is a separate savings account for emergencies. We advise clients when they are first beginning on their journey to start with $1,000 in the Emergency Fund. It’s not your savings for your vacation, it’s not your investments, it’s set aside specifically to plan for the things you can’t plan for: emergencies!
One of the reasons emergency funds are so important is because when an emergency happens, you are already stressed. We do not want you adding to that stress by having to come up with money for a plane ticket or ER visit.
In fact, when one of my children had to go to the ER FOUR times in 2020, you better believe not having to worry about how to afford them was SO very appreciated.
Likewise, when you’re planning to go to a funeral there’s enough emotion going on there. You don’t want to have to add money stress, anxiety or shame to the mix.
Emergency funds are particularly important when you’re trying to get your finances in order because emergencies and the unexpected can derail your progress quickly. It’s called Murphy’s Law, right? If it can go wrong, it will? So, we are planning for that so we can then put all of our money and energy to getting out of debt and building wealth.
Sometimes people have more saved up and they might be uncomfortable dropping all but $1,000 on debt. We get that, but this process is supposed to be uncomfortable. We say to trust the process millions of people have done. You’ll be okay! Plus, if what you were already doing, your method, was working, you wouldn’t be reading this right now, right? Tough love, but just trust the process. 😉
Here are the basic bullet points on how to set up your Emergency Fund:
- Use a seperate account from every other account you have.
- You might even consider using a different bank for this account based on your current relationship with money and money habits. How much do you trust yourself?
- Nickname your account something awesome. Maybe, “My Name Is NO!” like one of our clients did. It’s something that will help you remember what’s it’s really for.
- You can also hide the account if you so desire. Most banks have this feature and it helps your money to be out of sight, out of mind. This means less temptation!
Now, how do you know when to use your Emergency Fund? Well, first of all, let’s understand it’s not for borrowing, it’s not an ATM. Nope, there are three questions Dave RAmsey teaches you want to answer before you allow yourself to pull money out of your Emergency Fund:
- Is it urgent?
- Is it unexpected?
- Is it necessary?
Let’s take a look at one example we’ve had come through for the Emergency Fund to full explain this concept. One time while my husband was deployed my dishwasher went kaput! I had three kids which meant a lot of dishes. So, should I have used my Emergency Fund to replace it?
- Is it urgent? YES! I have three kids. I have a lot of dishes. They’re piling up!
- Is it unexpected? Um, yes! I had no idea it was on the fritz or even that dishwashers could break. 😉
- Is it necessary? Oh, here’s the really rude part. Technically it’s not necessary. Technically me & the kids can do dishes by hand. Technically, YES, it could wait until the next budget period and we could pay for it in cash!
So, there you have it. That’s everything you need to know about the Emergency Fund!
Hey, if you need help with this, you’re in luck. We have a super fun coloring page that you can print out and use to help you as you make progress saving up your starter emergency fund! It’s not fancy, it’s not complicated but it is FUN and it will keep you motivated. Download it now!