Life has a way of throwing us curveballs - sometimes ridiculously expensive curveballs. By keeping an emergency fund, you'll reduce the financial stress you feel when these curveballs get thrown your way.

Think about your life over the past six months; has anything happened to you that you didn’t plan for or didn’t expect? Did any of those things cost you money that you didn’t plan on spending? If your life is anything like mine, the answer is yes.

An emergency fund is a cash reserve of three to six months of your expenses monthly expenses. 

Why should you have an emergency fund?  

Life happens, and we can’t plan for everything. If you lose your job, you want to have a reserve to keep you going until you find a new job. What happens if you get sick and it comes with large medical expenses?

If you are anything like me, you may have car expenses that you can’t plan for. My car is 10 years old, so it seems like every time I look up, something breaks or needs to be replaced. That adds up quickly. And for me, if my car dies, I need to be able to cover a car note or down payment.

So what really counts as an emergency? Here is Dave Ramsey’s test:

  • Is it unexpected?
  • Is it necessary?
  • Is it urgent?

The more you answer yes, the more likely that it’s an emergency.

How much should you have in your emergency fund?

If you read three different articles about an emergency fund, you will read three different answers to this question. But most financial planners (and mine AKA my dad) say three months of expenses is a great place to start.

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Here is what I do: I save a small amount for unplanned expenses each month, but also keep three months of expenses saved just in case. I dip into my unplanned expenses budget for inexpensive things that hit me off guard. But if I lost my job or had a huge expense, I would dip into my larger emergency fund.

You may be thinking three months is too much and you can’t afford to put that much aside. But I would argue you can’t afford not to. You have to plan for the unexpected financially or you can put yourself in a world of hurt.

[clickToTweet tweet=”Think you can’t afford to save money each month? In reality, you can’t afford NOT to.” quote=”Think you can’t afford to save money each month? In reality, you can’t afford NOT to.”]

Where to start?

Start small. While Dave Ramsey and I (and others) recommend three months as a goal, start with some smaller, attainable goals.

Figure out ways to decrease your spending some to save to your emergency fund. This requires a bit of discipline, but if you can decrease your spending just a bit every month, you can start to create your emergency fund.

Set a goal of saving 10% of your paycheck each month until you’ve saved 3 months of expenses. For exampleIf your monthly expenses are $1,500, that means you’ll need to save $4,500 in your emergency fund. If you earn two paychecks of $1,000 each every month, set aside $100 from each paycheck at a savings rate of $200 per month. To save $4,500 at that rate, you would need to save $200 per month for 22 months, or just under 2 years.

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Keep in mind that when calculating your monthly expenses, you are only including the things you have must pay for. In a true emergency, you will be cutting back on your budget significantly and spending only what is necessary. You shouldn’t be spending your emergency fund on eating out or going to the movies.

Create a budget. If you haven’t already done this, sit down and do it. Check out our article on budgeting for tips on how to start: How to Create a Budget That Works With Your Spending Habits.

You can also download our Monthly Budget printable here to help you create that budget:

 

What happens next?

Once you have created a nice emergency fund with three months of expenses, you can start creating other financial goals.

Maybe you want to buy a house within the next few years, or buy a car. For me, both of those things, and graduate school are in my life plan, so I need to plan for them financially.

Here are a few tips are you work on creating your fund:

  • Decide where you will keep it. You want it to be somewhere that allows for quick access. I keep mine in a checking account. You may want to make a separate checking account from your main account so you don’t accidentally overspend and dip into your emergency fund.
  • Only use it for emergencies. This shouldn’t turn into your shopping or vacation fund (that should be in a different place in your budget). Really try to keep this for emergencies. Remember, you can’t plan for them and you don’t know when they will happen, so it’s in your best interest to be prepared for when they do happen.
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Creating an emergency fund has allowed me, and will allow you, to live with a peace of mind. When life and emergencies happen, we won’t have to worry about not having enough money to deal with said emergency.

[clickToTweet tweet=”Creating an emergency fund has allowed me, and will allow you, to live with a peace of mind. ” quote=”Creating an emergency fund has allowed me, and will allow you, to live with a peace of mind. “]

How do you plan to be financially prepared for emergencies?