You know this. I know this. Everyone knows this.
So, let’s agree that we need to create a plan to minimize the blow.
I’m going to walk you through how to create an emergency fund that actually lasts.
While experts have different opinions as to how much you should have in an emergency fund, almost all agree that some emergency fund is necessary.
After I go over emergency-fund basics, I’ll explain why you may want to have a separate emergency fund from your spouses, and why women need to save an emergency fund.
What is an emergency fund?
An emergency fund is a bank account set aside for use in the event of an emergency. It is a “rainy day fund” used for unexpected life events such as a home repair, job loss, medical costs, car repair, or unplanned pregnancy. It is not an account you use for non-emergency things, like upgrading your current car or paying for braces.
Having an emergency fund will give you a cushion in the event that something happens that you are not financially prepared for. Not only will you feel better with an emergency fund, you will avoid going into debt when something happens that you weren’t planning on (and it will). The best part about having an emergency fund is that when something unexpected happens, you will still be frustrated, but you won’t be scared because you have money for it. Your emergency fund gives you security.
If you have any interest in planning for your financial future or in being on a good financial foundation, you have a responsibility to have an emergency fund. If you have any expenses at all, if you own a home, if you own a car, or if you are a human being who could get sick (which you are if you are reading this), you absolutely need an emergency fund. Without it, you are betting that life won’t throw anything difficult your way, which is a very dangerous risk to take.
Where should you keep your emergency fund?
Most financial experts recommend that your emergency be highly liquid. Usually, this means in a savings or checking account (where you can access it quickly and easily). Essentially, you’re just saving a bunch of cash in the bank. While the money in your emergency fund is not going to earn and grow like it would if it were invested, that is okay. The point of your emergency fund is not to build wealth; the point is to have money that is easily accessible in the event of a rainy day.
(Side note: An emergency fund is not a line of credit you have open or a credit card with a high limit. In case of an emergency, you should use the money you have saved in the bank – not a credit card that gets you into debt.)
How much money should be in your emergency fund?
Financial experts vary in terms of what they recommend in an emergency fund. For example, Dave Ramsey recommends having between three and six months of expenses saved. Suze Orman recommends having at least eight months of expenses saved.
What exactly constitutes “expenses”? Expenses are everything you have to pay for. Think about if you lose your job. What costs would you still have to pay? These are the expenses that you need saved. Think mortgage/rent, bills, groceries, gas, etc. You would not have to pay taxes so you would not want to just multiply your gross income times x number of months. Instead, determine what you live off of every month and multiply that number by x number of months.
For example, let’s say you make $4,000 per month and your expenses are $2,500 per month. A fully funded emergency fund for you would be $2,500 x 6 months = $15,000. You would not use the $4,000 income number in the equation.
Factors that can help you determine how much you should save include: 1) the security of your job, 2) the number of income streams in your household, 3) your personal family needs, and 4) what makes your feel secure. How much you need in your emergency fund is a personal choice that you need to make based on your specific situation.
For example, if you have multiple income streams that are very secure, you may find three months is enough. Alternatively, if your job / business is not very predictable and it is your only income stream, you may want to save eight months to one year of expenses in your emergency fund.
- Related: 21 Days to a Better Budget
Why it’s a good idea to have your own emergency fund – even if you’re married
Having your own money means that you are standing on a strong financial foundation. When you have your own emergency fund, you can make your own choices without considering another person’s money. You have power over your life when you have your own money. Even if you are happily married, it is so important to be an active participant in your family’s finances.
If you are single, having an emergency fund for yourself is a no brainer. Additionally, if you are married, it is a no brainer to have a joint emergency fund with your husband. What may not be so obvious is why you should have your own emergency fund if you are married.
Even if you are married, you should consider having your own emergency fund. One reason is because if something bad happens in your marriage, you are financially prepared and do not have to let money be a factor in your decision. Unfortunately, divorce happens 50% of the time. Having your own financial cushion in the event of a divorce will help you make decisions based on the important things, not based on money.
If divorce rates aren’t compelling enough for you, there is another reason why you should have your own emergency fund: something bad happens to your husband’s identity or to his money. For example, if your husband’s identity is stolen and any account with his name on it is in jeopardy. Having your own account that is separate will mean you have money that is protected as a back up for your family.
Aside from divorce and identity theft, a third reason to consider having your own nest egg is death. If your husband dies before you, having your own money set-aside will make everything easier. If something goes wrong with his accounts or probate, it will be nice to know you do not have to worry about money when you are going though such a tough time.
Your own emergency fund does not necessarily have to be a fully funded emergency fund, but it should be enough that you feel safe. Maybe you have a family emergency fund that is six months of expenses saved and your own with two to three months of expenses saved, for example.
Finally, note that a separate emergency fund does not mean hidden. Complete transparency when it comes to finances is incredibly important. That said, only you know your situation and whether you need to save secretly for other reasons. But all things being happy and healthy, honesty in a relationship means financial transparency.
How to save for an emergency fund
If you want to start saving for an emergency fund, first figure out how much you need to save. Do this by multiplying your expenses by however many months you want to save for and then create a plan to save that amount. The easiest way to do this is to create a budget (learn how to create a budget here). Plan where every penny goes, including how much you can save every month. Consider taking a second job or side hustle to make money for your emergency fund if you don’t already have room in your current budget. You may find it helpful to set up direct deposit into an emergency fund. Create a plan that works for you and helps you achieve your financial goals.