The Importance of an Emergency Fund

The Importance of an Emergency Fund

All too often we can become comfortable in our surroundings and forget that bad things actually do happen to good people.  When something bad finally does happen, are you prepared with an emergency fund to help you get through the tough times?  Hopefully so as an emergency fund should be an essential part of every household budget.

The Gatlinburg Wildfire

The necessity of having an emergency fund hit home in several ways this past week for myself as the historically devastating widfire that hit the Great Smoky Mountains National Park and the cities of Gatlinburg and Pigeon Forge, TN and made national headlines for all the wrong reasons.  (My family is completely safe and we live about 45 minutes from the fire).  So far, it has left 14 people dead and 134 injured so far.  Not to mention the 1,000+ homes and businesses that either burnt down or damaged.

While there were wildfires in the vicinity for several weeks prior, they had not come close to endangering any city.  Unexpectedly hurricane like wind gusts of 87 mph arose and quickly made the fire get out of control.  Many people didn’t have time to prepare to evacuate and literally hopped in their vehicles and escaped.  Even then, several of the rescue shelters had to be relocated a time or two because of the spreading smoke and fire.

As many travelers have at least heard of Pigeon Forge, Gatlinburg, the various Dolly Parton attractions, you can imagine that this fire has a huge impact on the local economy.  The city of Gatlinburg itself only has 4,000 full-time residents, but, the city is overwhelmed with tourists virtually year-round helping make Sevier County earn the distinguishment for collecting the most sales tax in Tennessee each year.  Fire has damaged about half of the city and has left many people homeless and jobless as the area rebuilds.

Many churches, businesses, and communities have donated supplies and Dolly Parton has pledged $1,000 per month for 6 months to those affected.  While this goodwill is an essential lifeline to help these families, many people lost everything they owned.  This is why an emergency fund is essential.  To help prepare for the unexpected.

What you need to know about emergency funds

Most experts suggest having 3 to 6 months of basic living expenses in cash reserves that are readily accessible in case you need to quickly need it as this is the average amount of time needed to find an equal replacement job, as this is usually the most probable reason a fund might need to be used.  Unfortunately, most people cannot afford a $1,000 emergency.

Referencing the Gatlinburg fire, multiple families lost their jobs and homes in a matter of hours.  Others lost one but not the other.  Jobs and a place to sleep are very valuable blessings that we all think of as “terms of endearment” until you need to find another one.  They are able to receive temporary assistance at the moment, but, life eventually needs to return to normal and it takes money to do so.

How to start an emergency fund

If you are one of those that would struggle to find enough spare change to pay for a $500 or $1,000 emergency, do not fret.  Here are several ways to boost your emergency savings starting today!

  • Create a “No-Touch Account”

My wife & I pay our bills from one bank account and we keep our emergency savings in a separate bank account that isn’t linked to our credit cards.  We personally keep ours in a Capital One 360 high-yield savings account that earns a higher interest rate than a traditional bank savings account.  For all intensive purposes, this account is “out of site, out of mind” and we use it so infrequently, I can’t even tell you the exact balance of it (unlike our checking account).

  • Create automatic withdrawals

The hardest part with funding an emergency fund is remembering to put money in it.  Our fund gradually accumulated in size through regular monthly contributions.  I have it setup where Capital One will automatically withdraw $100 each month from our regular bank account where we deposit our salaries.

Just like you make sure to pay the electric or water bill each month to continue receiving service the next month, scheduling automatic withdrawals on payday might be the easiest way to fund your account.

  • Sell your old junk

If you are like us and just about everybody else that lives in North America, you have a closet (or garage) full of stuff you never use.  Selling any items of value and putting those proceeds in your emergency can be a one-time way to access some quick cash.  This is one reason why I sold my dream car.  Needs and hobbies change with age and it’s okay to “declutter” for the right reasons.

Improper Uses of an Emergency Fund

no-swimming-sign-1445168-639x637Once you have money in your emergency fund, the next challenge is managing it and determining what is a true emergency or something you should save for instead.

Here are a few scenarios of when you might consider using your emergency fund:

Example #1: Your car needs new tires that will cost $500 to replace.

Q: Should you use your emergency fund?
A: No.  While many people keep driving high-mileage cars because they are paid for and have lower insurance rates, one tradeoff is that they need more repairs than a brand new car.  Certain automobile expenses, such as tires, occur every few years and need to be saved for.

If you are involved in a car accident and need to buy a new vehicle or make some expensive repairs, this is when using an emergency fund is acceptable.  Nobody plans to get into an accident when they get behind the steering wheel each day, unless they driving to participate in a demolition derby.

Example #2: Your child falls from a tree and breaks their arm and needs medical attention.

Q: Should you use your emergency fund?
A: Yes.  You might need to pay the bill before you are reimbursed by your insurance provider.  Regarding medical expenses, it wouldn’t be a good idea to use your emergency fund to pay for braces or contact lenses.

Example #3: Your receive a water bill that is $100 higher than normal becuase of a leak.
A: Possibly.  We all receive “surprise” utility bills from time to time.  This example happened to us this past Friday as we received our water bill that was about $100 higher than usual and meant our leisuraley weekend plans were changed to digging holes along our 800-yard driveway looking for a water leak of 2 gallons per minute.  We finally found it Sunday evening after finding a smaller leak on Saturday.  🙁

We budget $50 per month to cover our normal monthly water bill.  This bill was for $146, plus we are two weeks into the current cycle, so we will have another elevated bill this month.  We will pay from this bill with our regular savings because it is small enough.  Typically we like to only draw from our emergency fund for expenses larger than $500.  For this expense, we will try to cut an expense from somewhere to offset the difference such as not going out to eat & buying fewer treats at the grocery store.

Example #4: Your dream vacation to Hawaii will cost $5,000.
Q: Should you use your emergency fund?
A: 
No.  Vacations are not unexpected expenses and need to be planned for through the year like Christmas shopping.  While I wish I could travel to elite tropical resorts or an Aspen ski chalet each vacation, our household budget normally only allows us to drive and stay at budget hotels or split a rental house with other family members.  If you get hurt, sick, or need to evacuate during your trip, that can be a legitimate reason to draw from your emergency fund.

What happens after you use your emergency fund?

If you have to pull from your emergency fund, priority #1 is making sure you & your family is okay and that the emergency has passed.  If so, you should try to replenish the fund as quickly as possible.  If you simple had to shell out some cash until the insurance company can reimburse you, place the funds directly into the emergency fund again.

Otherwise, dedicate a portion of your monthly income to restore the balance to its previous amount.  Make baby steps for funding to help keep the motivation level up.  Start with $500 or one month’s living expenses.  Eventually it will snowball into a much larger amount sooner than you realize.

20 Comments on "The Importance of an Emergency Fund"

  1. SO glad you and your loved ones are all okay. I’ve been thinking about you guys a lot as I read the news reports. An emergency fund is SO important. With our DTI starting out so high, we had a lot of trouble saving an emergency fund, but eventually we just started to put 1% into savings each paycheck. I figured we easily wasted one percent of Rick’s paychecks on stupid stuff, so why not put it into savings instead? Then we moved up to 2%, and so on and so forth.

    The gradual development of the savings habit made it not seem so painful, and the gradual increases have had the same result. You can save money, even on a super tight budget.

    • Thanks Laurie! Starting small is important. I tend to have the “all or nothing” mentality so I can definetely relate to I will only make a commitment if I can give the full commitment. But, even starting with $10 a month is better than spending it at McDonald’s or another unnecessary purchase.

  2. I’m glad to hear you and your loved ones are doing ok.

    You are spot on with the emergency savings advice. I think too often people don’t realize what is truly an emergency and what needs to be a budgeted expenses. Anything that you know will need to maintained or paid for on a regular basis should be budgeted.

    I say that but am always surprised when the car insurance comes every six months 🙂

    • Thanks. Fortunately, we live in the opposite direction of where the fires are, but, we do know several family friends that have houses that were within 1 or 2 miles of the fire at one point. They didn’t lose their houses. But, some of our extended network knows people that did lose their lives.

      I pay my car insurance by the month (no discount for prepayment), but we are always surprised when we get our property tax bill or the annual insurance membership renewal. I think it’s just the “sticker shock” of having to pay a lump-sum. It makes you really think if it’s worth it when you see the total cost instead of the monthly payment.

  3. Glad to hear you and others you know are okay. Very difficult situation.

    I think an emergency fund is by far one of the most important things to build up, even more important than paying off debt. I think most people struggle with finding cash flow to create an emergency fund, but sometimes making some key moves (debt consolidation to lower interest rate, etc.) can free up cash flow and allow you to build an emergency fund quicker than you’d expect.

    • I agree. You need to ensure you can make the minimum debt payments required to avoid monthly late fees or interest charges. It can be tough deciding whether to pay off debt sooner, but, personal finance is a balancing act. Whether it’s saving for a large purchase, extra retirement contributions, or prepaying debt in addition to the regular monthly bills.

  4. Up until this year I had zero emergency fund and never gave it a second thought, it really wasn’t a worry for me. I have just had to dip into ours to move places in emergency (the last place was a dump and was making us both ill), and although I know a huge chunk will go back into it when I get my deposit back on the old place, it’s still giving me sleepless nights knowing it’s lower than I’d like. How things change in just 12 months!

    • What a story. It’s great that you were able to find another place that will keep you healthy and be able to afford it until you get your deposit back. Intentional saving helped you tremendously in this case!

  5. We know from experience that emergencies happen (job loss), and while we’re more psyched to pay off debt, we have saved our e-fund. The question of when to use it and when not to use it changes over time. At one point, a car repair would have meant dipping into the e-fund. Now, it doesn’t. But if our van suddenly died, at this point we’d use the e-fund to replace it. Some day, even sudden big purchases like that will come out of a different account (like “car account”). The automatic savings route you’ve spelled out is definitely the way to go.

    • I think that’s a great point about how the purpose of an emergency fund changes. In the beginning, the emergency fund doubles as a savings account until it is large enough to set itself apart. The important thing is defining what is an emergency. Going out to eat because you do not feel like cooking isn’t an emergency, and if you borrow once what will stop you from doing it again.

  6. Good post. I think having an emergency fund is critical and it is surprising how many people live check to check with no savings. You hope to never need it but if you do, it can literally be a life saver. The last thing anyone needs is financial hardship on top of an emergency situation. Thanks for sharing!

    -Brian

    • Yea. It’s a self-insurance policy. We have used ours from time to time but have been sure to replenish it, like when your car transmission goes out a week before planning a big Christmas vacation trip.

  7. So sorry to hear about the fires in your area and those that were lost to it. Such a tragedy. An emergency fund has been so helpful for us over the years and I hope others find your post an encouragement to start saving one up for themselves.

    • I was surprised at the stats of how many people would struggle to fund a $1,000 emergency. Since my career change I will say that a $1,000 bill stings a lot more than it used to, but, my wife & I made sure we had a couple months in reserve during the transition. Thanks for stopping by!

  8. Glad you are all ok. We are all to familiar with wildfires here in Montana.

    We have a minimum amount of cash we keep on hand as income is not steady for us. So it’s a fund for emergencies and to cover our bills for 4-6 months just in case. I like the idea of setting aside a portion in a separate account for emergencies only.

    • When I lived in South Dakota, we had ash rain down a time or two. Thankfully the fires mostly stayed in the forest or hills. I forgot how dense and dark the air gets when the fire is that close & it rained ash that entire day. Until the windstorm came in at least.

  9. Great to hear your family has not been impacted by the fires. We visited the area four years ago and loved the it. I am deeply saddened by the loss.

    I love the examples you provide of when and when not to use the emergency fund. I think this is often overlooked and, with the money sitting there, it’s can be easy to use in non-emergency situations.

    • Thanks! Most of those examples are experiences of ours. The biggest mental trick for me is that I can’t keep it in our regular account. Even when we sold our car recently, I put that money in a separate account until we decided what to do with it, just so it wouldn’t be used to make the mortgage payment or pay the bills.

  10. Sammy Blackmore | December 27, 2016 at 1:39 am | Reply

    We only started having a no-touch account for emergency funds when one of our friends’ house caught fire. They took shelter in our home, and it dawned to me that having emergency funds is really a must. What if we were the ones who suffered such accident, and everything will be gone in just a snap of a finger.

    • My wife’s family had a similar experience and took a family in for a period of time. We are glad we had (& still have) one built up to help with the unexpected. Thankfully we haven’t had anything catastrophic where we have truly needed to use every last penny in it.

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