If you spend any amount of time researching personal finance, you probably hear a lot of talk about the importance of an emergency fund. You may have even read the recent article Is Your Safety Net Sufficient? from our partner, Marshall Clay, about the importance of a safety net. According to GoBankingRates, you might be one of the nearly 70% of Americans who have less than $1,000 in a savings account.
You may ask yourself: “What is an emergency fund? How much money should I keep in it? Where do I keep it? How do I start one when I’m living paycheck to paycheck?”
When you start from square one, an adequate emergency fund is the first step on the path to stress-free management of your personal finances. Maintaining an emergency fund removes the need to create debt to cover an unexpected expense and provides you with the comfort of knowing you can manage the next financial hurdle life throws at you.
An emergency fund isn’t going to solve all your money troubles, but it can get you headed in the right direction.
What is an emergency fund?
An emergency fund is money set aside for unexpected life events that could impact your financial future, your health, or your assets. It’s designed to pay for unanticipated expenses, but it is not meant to cover everything. Still trying to think of a scenario that may qualify as unexpected?
Examples of unexpected life events:
- A sudden need for a new HVAC unit or large appliance for your home
- Car accident/repairs and the need to pay an insurance deductible
- The unexpected loss of a job
- Your dog devoured another sock, and you have a huge vet bill.
In the examples mentioned above, an emergency fund could make a huge difference in how a situation might be handled both physically and emotionally. It could also help keep you out of debt. Keep in mind, there are scenarios where an emergency fund should not be used. Typically, these scenarios involve “wants” or “rainy day” items where a little saving might do the trick.
An emergency fund is not:
- Used for big, planned purchases like a house, a vacation, a car, or a new gaming console.
- A massive unattainable dollar amount.
- A set amount for every person. Your emergency fund is based on your lifestyle and needs.
- A stagnant amount that never changes. Your life evolves over time, and your emergency fund evolves with it.
Now that we established what an emergency fund is, are you ready to take that first step to start your fund? Our next SquareOne blog will discuss how much money you should keep in your emergency fund.
SquareOne: A Financial Foundations Blog is a personal finance series from The Welch Group. It was created to help provide readers with the foundational knowledge to be purposeful with money by identifying key financial concepts to help the reader control their financial future. Foundation topics include personal savings strategies, debt consolidation and reduction, life planning, retirement planning methods, and beginner essentials of investing and taxes.
Callie Jowers, CFP ® is an Advisor at The Welch Group, LLC, which specializes in providing Fee-Only investment management and financial advice to families throughout the United States. Callie is a graduate of the University of Alabama, is currently pursuing a Master of Accounting at the University of Alabama at Birmingham and is a Certified Financial PlannerTM.