Having an Emergency Fund is one of the first and most important steps in creating wealth. This simple act of saving will protect our families from the unexpected events of life and the dreaded ‘rainy day’.
I haven’t always had an Emergency Fund. When I was in my 20s, I was so strapped for cash that my emergencies (and non-emergencies alike) forced me to borrow from my home equity line of credit (HELOC) to the tune of $4,700. Also, I had little to no savings in the bank. My dire financial situation was a combination of too much spending, not enough income and a lack of planning.
I was tired of feeling broke so I decided to make a change in my life. To find inspiration, I started reading, listening and watching personal finance gurus like Suze Orman, Dave Ramsey and Robert Kiyosaki. These inspiring leaders helped me to think more proactively about my money. I learned that if I wanted to get out of debt, I need to stop borrowing. It seems quite obvious, but it was a true epiphany moment for me!
In order to stop the borrowing cycle, I needed to have some cash reserves. That’s where the Emergency Fund came into place. From that moment forward, I began saving more and spending less.
My savings account balance started to steadily grow as I took some smart financial actions. Some of those money moves included:
- Direct deposit a portion of my paycheck each month into my savings
- Living on a budget and saving first before any of my “wants”
- Using Facebook Marketplace and Craigslist to sell some used and unneeded items in my house
The process did take me a couple of years, but today I live with an Emergency Fund that is the equivalent of three full months of expenses. It’s a like a warm blanket that protects me from the cold air of debt, irresponsibility and poverty.
Here are 5 reasons I’m so glad that I have that Emergency Fund today:
1. Job Loss Protection
If I unexpectedly lose my job, I will have 3 full months to find another suitable position that fits my desired income, lifestyle and typical monthly expenses.
Could the job search last longer? Sure it could. Based on my personal situation, I feel comfortable with 3 months in cash versus 6 or 12 months. If 3 months seems light for your employment situation, definitely save more.
2. Keeps You From Going Back into Debt
If I didn’t have this Emergency Fund and I needed new tires, how do you think I would get the money? Ding, Ding, Ding! You guessed it. I would borrow on a credit card or my HELOC and nasty cycle of debt would continue.
With the Emergency Fund, I avoid the debt cycle that used to hold me back.
3. Protection from the Unexpected
Since I’ve had the fully funded Emergency Fund, there have been quite a few reasons to dip into it. Here are a few that happened over the last 10+ years:
- The sump pump overflowed and flooded the carpeted basement = $1,000!
- That crazy “Polar Vortex” winter created ice dams on our roof, cracks in our ceilings and constant leaks = $10,000!
- Someone ran through a red light and smashed into my car = $500!
Life happens as they say.
4. Higher Deductible Insurance Plans Savings
With an Emergency Fund, I’m able to take advantage of higher deductible insurance plans. Essentially, the more risk I’m willing to take on, the less I have to pay the insurance companies. This savings opportunity could be available through your health, car and home owners insurance.
With the recent switch to my employer’s higher deductible health care plan, I was able to save an additional $1,300 per year!
5. Allows for Flexibility
Let’s say there is a last-minute funeral I want to attend. I have the money to go. Let’s say I want to help out a friend in need. I have the ability to gift (not loan) them the money.
This type of flexibility makes me feel comfortable, empowered, and excited about my future.
How much do you think is a reasonable amount to have in an Emergency Fund?
Please let me know in the comments below.