An emergency fund is exactly what the name implies; funds that you set aside to use only in case of an emergency. Establishing an emergency fund is one of the very first and most important things you can do with your finances.
I also like to think of it as a very basic form of self-care. Having a certain amount of money set aside that you know will always be there is very assuring. If I lose my job, or have a major health issue, or if my car breaks down, I know that I at least have a financial cushion to help bear the brunt of a large and unexpected financial expense.
Financial concerns are a huge source of stress for women, so its extra important for us to have a big cushy emergency fund to help reduce stress and alleviate some worry from our lives.
How Much Do I Need to Save?
The old rule of thumb is to save up between 3 and 6 months worth of expenses in your emergency fund. That can add up to what feels like a pretty impossible sum, especially if you already don’t have a lot of extra room in your budget every month. Start by saving one month’s worth of expenses and build from there.
We’re women, which means we’re super experts at multi-tasking, so after you’ve saved one month’s worth of expenses, focus on paying off any high interest debt you have, and on the side, keep socking away a few dollars into your emergency fund whenever you can. I’m a huge fan of micro-saving, so even if you are adding $20 here and $50 there, that adds up over time. Plus, you’re putting this money into your own savings account, so its still going to be there if you absolutely need it.
I personally keep about 6 months worth of expenses on hand at all times. Approximately 3 months worth of expenses is in a high-yield savings account that is fully liquid, and another 3 months is saved in a brokerage account invested in low-volatility, high-dividend funds that I can liquidate within a few days, if needed.
This works for me because I have a pretty consistent paycheck and multiple income streams, but if your situation is more volatile or uncertain, consider saving up an even larger emergency fund. Maybe you’re self-employed or work in an industry that could suffer a downturn (hospitality businesses in the pandemic, being a particularly painful example), or maybe you have a lot of folks who depend on you financially. If so, slowly add to your emergency fund over time while still trying to contribute to a tax-advantaged retirement account.
Where Do I Put My Emergency Fund?
Definitely don’t keep your emergency fund in your checking account, that’s for sure, because you’re likely to spend it! So always keep your emergency fund in a separate savings account that is FDIC insured. Ideally, your money is in a high-yield savings account so that it earns a little bit of interest for you every month. I like to keep my emergency fund in a high-yield savings account with a different bank than where I have my main checking account so I’m less tempted to transfer a few bucks to cover an impulse purchase.
What Qualifies as an Emergency?
A financial emergency is any large surprise and unplanned-for expense. Like a major home or car repair, or unexpected last-minute travel to see a sick or dying loved one. A major medical expense like surgery or dental work, or a loss or significant decrease in income. Real, unexpected, out of the blue types of emergencies are what your emergency fund is for. Not for a European vacation or a shopping spree (start a different savings account to pay for those things, if you really want them!). Actual emergencies.
Having an emergency fund that you hopefully never or only rarely have to tap into is one of the easiest ways to reduce some financial stress in your life so that you know if shit does happen to hit the fan, you’ll at least have a financial cushion to help you manage it.