Do you think about saving money but just can’t seem to get it done? Or, do you wonder what the big deal is about having a savings account? Whether you call it a rainy-day account or whatever, you need an emergency fund. You might not think it’s important, but I’m going to show you three reasons an emergency fund could make all the difference in your life...
The following post is by MPFJ staff writer, Laurie Blank. Laurie is a wife, mother to 4 and homesteader who blogs about personal finance, self-sufficiency and life in general over at The Frugal Farmer. Part witty, part introspective and part silly, her goal in blogging is to help others find their way to financial freedom and to a simpler, more peaceful life.
What is an Emergency Fund?
The definition of an emergency fund, according to Investopedia, is this:
“An emergency fund is an account for funds set aside in case of the event of a personal financial dilemma…”
Financial experts largely agree that your emergency fund should contain three to six months’ worth of living expenses. Some say three to six months’ worth of salary, but the point remains that your emergency fund should have a significant amount of money in it.
My personal opinion is that an emergency fund should have a minimum of $10,000 in it; $20,000 would be better. If you’ve got a large family to support or high monthly expenses, consider heading toward the $50,000 range for your emergency fund.
This might seem like a lot of money to have sitting around. However, I’ve listed three reasons here you might find an emergency fund quite the benefit.
1. A Job Layoff
Job layoffs, expected and unexpected, happen all the time. And most people don’t prepare themselves for job layoffs ahead of time.
We simply don’t live in the world of our grandparents where you work at the same place for forty years and retire with a plush pension.
You may be thinking, “Well, I’ll just get another job.” Maybe. Maybe not. My brother-in-lawn got laid off from what most would consider a secure job after the Great Recession. It was five years before he found steady work again.
As you can imagine, that put quite a financial burden on his family, which included a stay-at-home wife and three kids. Job layoffs do happen, and they aren’t always short lived.
2. Health Issues
Another reason to have a plush emergency fund is to pay off medical expenses for health-related issues. I know a family whose young son had a very serious dirt bike accident. Their hospital bill copays amounted to over $100,000.
Basically, they’d just become responsible for what amounted to a small mortgage. Their life became an instant financial struggle as their income level was just over the level to qualify for any kind of payment assistance from the hospital.
3. Unexpected Opportunities
Your need for an emergency fund doesn’t necessarily have to be a negative one. Maybe you have a chance to take your dream job, but at a large salary cut.
Or maybe you’ve decided that you want to go back to school. Or take a sabbatical. A mission trip. Move to another country.
Put yourself in a financial situation where you can go for unexpected opportunities instead of having to pass them by. Save enough money in your emergency fund to cover whatever expenses you might need to chase your dreams.
Where You Should Store Your Emergency Fund
So, you might be wondering where you should hold that kind of money. While it might be tempting to invest it and make more money, I caution against that.
Your emergency fund should be liquid and easily accessible for the sole reason that emergencies are typically unexpected. A traditional savings account is likely the best choice. Choose a high interest paying account to maximize your interest earnings.
Summary
While it’s good to think positive and hope for the best, unexpected expenses do arise. Protect yourself and your family by having an ample emergency fund. You won’t regret it.
***Photo courtesy of https://www.flickr.com/photos/andrewbain/521898569/in/
