The Nuts and Bolts of Emergency Funds.

By Alicia Donner

Along with tracking, another foundational element of financial empowerment is having an emergency fund.

Lots of people balk at this: “What if I have other, high interest debt I’m working on paying down?” or “I’m barely making it with my expenses as is and now you want me to save?” But it’s true! We wouldn’t lead you astray! Not ever! Even all the big names in personal finance say so:

As you can see, we all need access to funds that are liquid (i.e., can be easily turned into cold, hard cash to pay for something) not assets tied up in real estate or your retirement account but rather money in an insured bank account when life throws us those inevitable curveballs. Maybe it’s a hefty car repair needed in order to pass inspection or an unexpected medical or dental bill. No matter what, even if we cross all our fingers and toes that these things don’t happen, sometimes they do.

Now that we’ve established why you need the emergency fund, let’s talk about how much it should be. As with so much in the world of personal finance, it’s personal. Ultimately, your emergency fund should be the amount you feel comfortable having “just in case.” It’s an amount your household is okay with NOT touching when you don’t need it – but then can turn around and use in case of emergency. Again, with so much in this world, financial empowerment takes a lot of self-control, moderation, and thinking strategically!

Luckily, we do have some good guidelines for building and using emergency funds:

  • It’s okay to start small: start by saving regularly (saving is a habit, after all) and building up to a nice round number like $500-$1000
  • Ready to level up your emergency fund? Shoot to save 3-6 months' worth of expenses
    • And how do we figure out this number? Why, tracking, of course!
    • It’s good to have a couple different numbers in mind when you’re thinking of this: your current level of spending (with all your usual spending and wants included) and your bare-bones, Ramen Noodle Budget (a very lean spending plan: what are the things you need to survive and what are the things you can live without?). You can work to save either amount (or more!) but you definitely want to spend closer to the Noodle Budget level when you are living off an emergency fund.
  • This money needs to be liquid. It’s important where you stash it! We recommend putting your emergency fund in a high-yield savings account.
    • These accounts have various benefits, most importantly: higher interest rates than traditional brick-and-mortar banks as they are mostly online only and are often “out of sight, out of mind” - when you keep your emergency fund at a bank that’s not your primary bank (and not connected to your checking account), you’ll be less tempted to spend it when you’re not supposed to!
  • A credit card is NOT an emergency fund. This is a common mistake – and an easy way to get into high-interest and high-stress debt :/
    • Credit cards should NOT be thought of as lending vehicles or extra income, but rather as a convenient way to pay for things in the moment. Having access to a credit card is great when you need to pay for something right away and can’t access your emergency fund: for a tow on a Saturday night, a copayment at urgent care. But best practice is to pay off that emergency spending on credit ASAP! You can pay off most credit card spending as soon as the purchase posts and, at the very least, always plan to pay off your full balance every statement – especially if the spending on the card was due to an emergency and you have an emergency fund!
  • Once you have an emergency fund established, don’t be afraid to use it!
    • Whether large or small, know that it’s okay to use your emergency fund for emergencies. It’s easy to get stuck in the thinking of “I’ll never save this much again! I can’t touch it! Where’s that credit card...” but that’s exactly what you DON’T want to do! You’re going to end up paying way more for that emergency if it stays on a high interest credit card for months rather than just being paid off promptly.
  • Emergency passed? Whew! Time to rebuild – start by bringing your emergency fund back up full capacity!
    • Even Dave Ramsey, the king of debt annihilation, suggests this! Step one of his Seven Baby Steps is the $1000 emergency fund, and you put all additional debt payments (over the required minimum) on hold if that fund is depleted until it is fully funded again.
    • If you’re working on rebuilding your larger emergency fund (3-6 months’ expenses), this will probably take some time. Even so, it’s not impossible! Like with all saving, it’s habitual: set an amount you can afford to save for your emergency fund each month and start socking that away!

And there you go: the nuts and bolts of emergency funds. Want to talk with an accredited financial counselor about building your own emergency fund or other financial goals? Consider scheduling an appointment with the PGH Financial Empowerment Center today!