Emergency Funds: Is It Really Necessary?

Real Estate Attorney with Dollars Plus Sense
Right now with all of the economic hardship caused by COVID-19, it's more important than ever to have an established emergency fund. In this article, I'm going to give you some quick tips on how to build your emergency fund so you can get through hard economic times.
How do you define an emergency fund? 
An emergency fund is money set aside to cover large unexpected expenses or to help you through hard financial times. 
Why is it important to have an emergency fund?
It’s important to have an emergency fund because it helps you prepare for unexpected expenses and helps to avoid getting further into debt. Having an emergency fund also prevents your budget from getting thrown off when an unexpected expense comes up. 
How much should you have in your emergency savings?
If you have high-interest debt, I recommend having at least $1,000 in your emergency fund. I want to be clear that $1,000 is just a starting point. A $1,000 is usually enough money to get you through most emergencies like car repairs, an emergency trip to the vet, or a trip to the urgent care; but it's clear that $1,000 is not enough if you're going through a job loss (as we can see with this recent coronavirus pandemic).

Once you pay off your high-interest debt, I recommend saving 3 months’ worth of living expenses if you have relatively strong financial or job security. I recommend 6 months (or more) if you have some instability in your employment or if finding another job could take you a long time.
How do you prioritize saving for an emergency fund? (say, versus paying down debt or saving for retirement)
You should have at least $1,000 before paying down debt or saving for retirement. Having an emergency fund should be your #1 financial priority. Once you have at least $1,000 saved up in your emergency fund, I would then focus on saving for retirement or trying to pay down any high-interest debt that you have. I consider anything with an interest rate higher than 8% to be high-interest.

What are the best financial products for saving an emergency fund?
You should keep your emergency fund in a savings account or a money market account. You should NOT keep your emergency fund in a CD, stocks, or bonds.
What are some useful tips and strategies for building an emergency fund?
The key to saving a significant amount of money to build your emergency fund is to try and cut your biggest expenses before anything else.  The reason why it’s so crucial to cutting your biggest expenses first is because this is the area you can make the biggest impact and recapture the most dollars. Another reason why cutting expenses is important is because the less you spend, the less money you will need for your emergency fund.

If you want to learn more about emergency funds or looking for an easy to use emergency fund calculator, you can read my detailed article "How To Build An Emergency Fund."

Comments (1)

Joan Cox
House to Home, Inc. - Denver Real Estate - 720-231-6373 - Denver, CO
Denver Real Estate - Selling One Home at a Time

Dafina, great post especially during this pandemic.   So many restaurant workers had no savings, and even some REALTORS.  If they went thru 2008, REALTORS should know to put dollars into an emergency fund.

May 13, 2020 02:09 PM