Emergency Funds & How to Start Today

Everyone needs it, yet so many don’t have a sufficient Emergency Fund (or one at all). As an advisor, it’s one of the first things I check for in a client’s financial picture and one of the first things everyone should prioritize.

What is it?

An Emergency Fund is exactly what it sounds like – a sum of money stowed away for any unexpected emergencies. In an ideal world, your Emergency Fund would be enough to cover at least 3 to 6 months of nondiscretionary expenses. A nondiscretionary expense includes any of the more essential monthly costs such as rent or mortgage, insurances, loan payments, groceries, etc. I wouldn’t say things such as streaming subscriptions and nail salon visits count as essential, but that comes down to a matter of personal priority.

Why do you need it?

“Life happens!” Yes, it’s an overused phrase, but it’s true. Typical unexpected events that may force someone to dip into an Emergency Fund include a job loss, disability, sudden home repairs, car repairs, or medical expenses. Being prepared can help avoid the need to take out high interest loans or credit card debt as a way to cover costs in any of these scenarios. Again, 3 months is a recommended minimum, but your specific situation may lend itself to a higher threshold.

If you’re one of the many people looking to start building or even assess your current progress, consider these steps.

Step 1:

Determine what qualifies as an “essential expense” for you. What could you truly not go without on a monthly basis?

Step 2:

Add up all of your essential monthly expenses. Take a look back at your bank and credit card statements to see exactly how much money goes to each of those items for one month. Now, multiply that amount by 3 (or more). This is your Emergency Fund goal.

Step 3:

If you’re not yet at your goal, set up a monthly automated contribution plan into your Emergency Fund. Figure out what you can comfortably set aside each month and then take the thinking out of it! Most banks these days allow you to set up an automated and recurring transfer between accounts. Maybe you do it on the 1st of each month or the day you typically get paid. However you go about it, the idea is to pay yourself first.

Step 4:

Separate your Emergency Fund from other money. It’s helpful to compartmentalize your finances. Don’t leave your “Emergency Fund” inside of your checking account where daily expenses are drawn from. Your retirement account isn’t your “Emergency Fund” either. Create a unique account where this money will live and not be touched until it’s absolutely needed.

Step 5:

Keep it safe and accessible. This ties into “Step 4”. Because an Emergency Fund is something you may need to get your hands on unexpectedly, you want to be sure that you can access the money without experiencing any fees or penalties and you want to be confident that what you’ve put in there won’t have lost value. A few good options are a basic savings account at a brick-and-mortar bank, a savings account with an online bank, or even a money market fund.

Keep in mind that achieving this can take time – and that’s ok! The most important thing is to take action. Hopefully, you’ll feel any stress start to slip away over time while a sense of accomplishment floods in.

Edward F. Jurgielewicz III

President

SMRU #1871036