At this point,  you’ve either heard about an emergency fund your whole life OR you don’t even know what it is and why you’d need one. In this article, we’ll be talking about the starter or “baby” emergency fund, if you really need it, why you’d need it, and how to properly use it. 

If you’re somewhat familiar with the whole personal finance how-to world or have ever looked into getting debt free before, you probably feel like the emergency fund is just the first go-to that every financial anybody talks about. 

There’s good reason for this. In fact, it’s such a big deal to establish a starter emergency fund, that you shouldn’t even attempt paying down debt until you have this little stash of cash set aside first. 

Don’t worry about “everybody else”

Only 1/3 of people are saving ANY money. So if you can just do this, you’ll be ahead by miles. 

In fact, recent studies show that HALF the population has no savings at all. So basically, everyone around you is doing it wrong, even your uncle Joe who tells you what you should be investing in every time he sees you.

I used to be there –  I had no savings, spent everything I earned, and was winging my finances – just like everyone around me. As much as my parents did teach me, it wasn’t enough, and the truth is, I had to dig in and figure a LOT of this out on my own. Abundant life? HA!! Not when I was in 80K of debt!

I can totally imagine how this would play out if you tried to tackle this whole financial journey on your own, with out aim or rhyme or reason and accidentally got the steps out of order. In fact, I can totally see how finances and budgeting and this whole “money” thing would be completely confusing and overwhelming.

Because I was there too. But what was the main stepping stone that gave me some confidence and some breathing room? 

You’ll never guess… okay, okay. You’re right. The Emergency Fund.

So, let’s break this down together because no matter where you’re at financially, you have some opinions about this emergency fund thing, and I bet there are a few misconceptions mixed around in there too. 

First Misconception:

“If an emergency comes up, I’ll just use my credit card.”

These same friends, bless them, will also say things like “I’ll just get a loan if it’s bad enough.” or “I’ve got plenty of available credit” or “I’m pretty good at solving problems, I’ll figure something out.”

In a true emergency situation, no matter what it is, you don’t need the additional stress of trying to figure out how you’re going to pay for anything… the deductible, the airline ticket to see a loved one before they pass, the transmission, the dog’s surgery because a bob-cat jumped into the back yard (yes, that has actually happened in my neighborhood! And no, I don’t live in the boonies.). 

Credit is not an emergency fund. There are several issues surrounding the “default to using credit” mentality, and that’s probably what got you on this whole journey in the first place. 

Among a million others, here are a few questions that immediately pop into my head: 

What if you don’t have enough of a credit limit to even cover the emergency? 

Did you know the credit card company can lower your credit limit whenever they want? 

Did you know that any loans you have can be “called” by the bank immediately, at their own discretion? 

What if you lost your job and you literally can’t qualify for a loan or a new credit card? 

More often than not, emergency situations hit one after another and the best way to head this off at the top is to be prepared. 

Plus, the emergency it self might not even be the problem. The trouble may be the timing. 

Karma has it that as soon as you foot the bill for that awesome vacation, home improvement, wedding, or tuition, this other thing is going to jump out and surprise you. 

It’s like a lurking joke in the shadows, just waiting for you to put all your savings into buying a home so he can laugh in your face when your water heater explodes all over the carpet on the day of your two-year old’s birthday party within an hour of the guests arriving. Yep, true story. 

At no time do you want to be faced with making potentially life or death decisions or coordinating logistics in a tight time frame, while being concerned about money. Money gives you options and freedom of choice, so naturally, not having any savings holds you back.

Ok, so save some money for an emergency, cool. 

Where to Keep It

So if you can stash away a small sum of cash for this starter emergency fund, what do you do with it? 

It’s one thousand dollars, and that ought to learn something right? 

Not really. This small savings is not to be looked at as an investment that will earn you interest. The reason it’s so important is because it’s the beginning of your foundation of stability.

This money shouldn’t be in a CD, a mutual fund, or anything else. This isn’t investment money and should be nowhere near the stock market. Don’t put it into your retirement accounts either. Considering your retirement accounts as “savings” is a recipe for major fees (like up to 40% of the withdrawal value) and a huge time delay plus complications in getting that cash. 

Separate (investments = long term)

versus

(emergency fund = short term) in your mind. 

This isn’t a sexy account. It’s just a standard, boring  savings account earning an extremely small percentage of interest, if any. Get the best perks you can, but bottom line, it’s just a normal savings account. 

This cash is the money that will come to your rescue in an emergency to save you from turning to credit. Let’s think of credit as that old scummy boyfriend. Cash in the bank equips you so that you can break the cycle. No more running back to him.

So, while it needs to be easily accessible, I do suggest that it be at a different bank and not connected to your checking account. It should not be one of those automatic buffer accounts where if your checking gets below a certain value, you can just make a transfer to “pad” it. That’s a dangerous recipe for blowing your emergency fund $50 at a time and having no idea where it went or why. 

If it’s located at another building (Capital One versus Chase Bank) or at an online bank (See Ally or Dollar Savings Direct), it’s completely accessible, however you’ll think twice and have to go through a few extra steps to get to that cash. 

I’m not a Doomsday Preparer though

I’m not a paranoid person. I don’t have a bomb bunker out back, I don’t hoard bottles of water, nor am I prepared for the Zombiepocalypse. 

You don’t need to be nuts to be aware and prepared. If you’ll live to be 100 years old, which is statistically likely at this point, something is going to happen, sometime. There will be surprises along the way, not in a great way, and while I hope it’s not a big deal, there’s a chance it could be. 

So, when something does come up, you use this money to pay for it.

So maybe it’s more fun to call it an opportunity fund – meaning that when something comes up, you have the opportunity to take care of business with confidence. Or maybe you like to call it an F U fund (yes, that stands for what you think it does) because if you’re ever in a tough spot you can ditch your employer or an abusive situation easily. It’s your peace-of mind fund. 

While I don’t exactly like the name “emergency” fund because it has a negative connotation, let’s be real- that’s what it’s for. An emergency isn’t ever really positive, is it? I’ve never heard of someone having an exciting or positive “emergency” have you? 

Whatever you call it, this fund is to get you out of tight spots. Like for when stuff hits the fan. 

When you Can Use it

While the name is simple to decode, you’d be surprised how little emergency funds are actually used their purpose, emergencies. 

This savings account is for things that blindside you – events that there’s no possible way you could have planned for. This is your untouchable fund- it’s not for when you’re short on cash. It’s to get you out of hot water. It’s your money body-guard. 

Things that constitute an emergency are not: going out to eat because you forgot your lunch, grabbing take-out because you “dont’ have time”, getting a new couch because the one you’ve been looking for just went on clearance, and most of all, this is not a vacation fund. 

Just because you just got an email that says it’s $59 to Hawaii (courtesy of Southwest) does not mean you can use the money you worked so hard to save can be used for an exciting adventure.

What you can use an emergency fund for are things like flying to visit a very sick grandparent just days or minutes before they pass, the deductible on your car insurance after an accident, the $500 new radiator on your vehicle after being stranded. 

An actual emergency could be large or small. $100 for a sick child’s doctor visit feels like a million dollars when you have zero cash. But when you have $1000 set aside, it still stinks but is manageable. 

Now maybe that’s the only $1000 you have and it’s nerve wracking to spend it, but that’s fuel to the fire to build it back up again. 

I’d rather write a check that makes me cry versus crying over pressure and indecision and fear because I had no money and therefore limited choices. 

How to Properly Use It

If and when an emergency occurs, you use this savings to pay for whatever it is – the deductible, the co-pay, the mortgage/ rent – you do what you gotta do. You pay for it with cash from this savings account.

Meanwhile, you pause your debt payment plan and go back to making minimum payments on everything. 

As soon as you’ve handled the emergency, you’ll switch your focus to replenishing your emergency fund. You’ll want to get ready to face anything else that comes your way. 

Use the over-the-minimum you were putting toward the debt at the top of your list to deposit into this savings account for as long as you need to replenish it. 

Prepared is the new you. Calm, cool, and collected in the face of danger, why? Because you know, with more confidence (and cash) than ever before, that you can handle whatever comes your way. 

How the Emergency Fund Changed My Life

Our own emergency fund saved us so many times I can’t even count. The stories that really flood my mind though, are from when we didn’t have a safety net. 

One of the big ones was on a road trip years ago- we had my husband’s Ford Taurus packed to the brink with 3 couples in total. “Old blue” had aluminum heads which melted when the car over heated. We found ourselves in the middle of nowhere and relying on the only mechanic for hundreds of miles around telling us it was irrepairable. 

We had no savings and no option except to believe this guy. We couldn’t afford a tow, a rental, and surely not a new car. We were completely unprepared and all our friends were depending on us to get to the destination weekend we had planned. 

All of that laid out, I have no idea why we thought we could afford a weekend away, but hindsight is 20/20.

Savings would have given us the option to make our decisions more slowly and with confidence instead of being pressured.

No savings = no freedom

We ended up “selling”, cough, I mean giving the car away for a few hundred bucks because we didn’t feel we had a choice and had no idea what else to do. That led to making payments to the hubs’ parents for their old car. Thank goodness they were about to get a new one anyway.

What would things looked like if we had a couple grand stashed? What decisions would we have made differently? 

What we would have done, I don’t know. But I do know we would have been able to be more calm and collected about the decisions we made and that we would have had the freedom to make our decision more slowly and confidently. 

That was before I knew all this finance stuff. A little life experience and an 80K journey out of debt later, and my point of view is so different. 

The Twist

A funny thing happens when you start to build savings. You’ve operated your whole life without any cash, fully on credit, and completely oblivious to how crazy that is because it’s your normal and it’s what every body else is doing too. 

Everything you’ve ever known makes it nearly impossible to break away from the ingrained autopilot actions to just use credit. So, you’re resistant to someone telling you that you’re doing it wrong and you literally think it’s crazy to save up some cash. 

How is that crazy? What is crazy about having some cash in the bank set aside for when you hit a rough spot? 

Then, when you finally decide to “do this thing” and save up $1000 as a starter emergency fund, you’re resistant to using it- even in the face of an emergency. 

Suddenly you realize what it actually means to have security. It becomes SO hard to let go of that money and actually spend that cash on an emergency. You, for the first time in your life, know what it feels like to have worked SO hard for something and then have to give it away. It’s really nerve-wracking to spend the only thousand you have. 

All of a sudden the whole cash lifestyle things makes sense. It really is harder to “let go” of cash as opposed to swiping plastic all day every day. Now that you know what it’s like to have that small security blanket, you’ve got a small teeny window into what it could feel like to have no debt and a fully funded 5 figure emergency fund, right? 

Okay, maybe that’s still hard to imagine, but you can try, right? It’s exciting- invigorating actually. 

As you grow and move forward in your financial knowledge through this series and as you establish your starter emergency fund and begin to pay off debt, you’ll notice that things that used to be an “all hell is breaking loose” emergency aren’t really that big of a deal anymore. And it’s pretty dang refreshing. 

6 months from now $160 to repair the car who’s engine you’re desperately trying to keep running because you can’t afford a new one won’t break the bank. 

Why? Because you’ll have an emergency fund in place AND because you’ll be spending within your means & following the budget, AND because you’ll have paid down some debt which in turn took some of the pressure off. 

Accumulating Benefits

It’s not just one or the other thing that you check off your list and then you suddenly feel great. 

It’s the compounding effect of making these small choices and taking care of business, one step at a time, one week at a time. 

It’s the accumulation of these good choices and the combination of their good will being reflected back into your life. 

Another magical thing happens as you establish this solid financial foundation, the clouds part and the sun shines a single ray of warmth down upon your head and angels sing…. Just kidding. 

But really, you’ll notice little breaks that come your way. A bonus at work or a found gift card in a drawer, a sale on something AND a coupon! You’ll become more resourceful and more aware of prices and savings and earning opportunities, maybe without even realizing it. 

You’ll be bustin’ your buns at work because you’re so focused on getting out of debt and your boss will notice – suddenly you’ll get a raise. Maybe a new job opportunity comes up with a significantly higher paycheck. 

Positivity begats positivity. So stay positive, work the steps with me, be diligent about completing one before moving on to the next, and you WILL make significant progress – I know you will!

As with each step, let me know if you have questions or if you feel something is missing. I could talk about this stuff all day (obviously) so I’d love to hear a status update, how this is helping you, and any feedback you have for me!