You wouldn’t want to get caught in a rainstorm without an umbrella, and you definitely wouldn’t want to be faced with an unexpected expense you can’t afford to pay. This is why it’s important to have emergency funds.
Our guide will explain the ins and outs of emergency funds, what they should be used for, and how to set one up. We’ll also provide alternatives for what to do when you’re faced with an expense you aren’t prepared for.
Emergency funds are an amount of money saved and set aside for use during a financial emergency. These funds come out of a person’s income and can be built up over time.
The idea of the emergency fund has been around for as long as civilization has. Economic crisis and food insecurity in the past has emphasized the importance of these funds. The COVID-19 pandemic was a recent reminder of the importance of emergency funds.
Typically, an emergency fund has enough money to cover all expenses for at least one month, although some people may only have a small emergency fund for emergency purchases that aren’t covered in their everyday banking account.
In summary, emergency funds are used as a parachute during an unexpected and urgent financial expense.
People have varying definitions as to what constitutes an emergency. We can all agree on the typical emergencies that require urgent attention, such as acquiring food or shelter. Other items may be more controversial.
Emergency funds need to be set apart for very particular uses and nothing else. They should not be used for shopping, flash vacation deals, investing, or loaning out to others.
Here are what emergency funds should be used for.
The most important reason to have emergency funds would be to supplement an unexpected job loss within your family unit. The loss of a salary or monthly wages would be devastating to most Americans in the 21st century.
While the possibility of finding a new job is present, on average it takes Americans three months to find a new suitable position. Without emergency funds, you will either eat through your savings and assets or accumulate debt to stay above water during this time.
A sudden storm or accident can wreak havoc on one’s property. From flooding to physical damage from fallen trees, your home can’t be left unfixed. Housing repairs are deemed as a financial emergency that should be addressed ASAP to ensure the safety and living standards of the residents.
At times, insurance companies may approve a claim for these repairs, but the waiting time seems endless. Emergency funds are a way to get you through these difficult scenarios with less worry and stress.
Large home appliances such as refrigerators, stoves/ovens, water heaters, and washer/dryers have a limited lifespan. Sometimes one may break sooner than you had anticipated, leaving you with spoiled food, limited cooking options, no hot water, or a lack of clean clothes. These large appliance repairs are also deemed financial emergencies and can be faced with an emergency fund.
If you live in a suburban or rural area, a car is a need to access your work, food, and other places of interest. Ignoring your car’s maintenance or an issue with your vehicle is setting yourself up for a bigger problem and bill down the line. Use your emergency funds if you need to deal with an unexpected visit to the mechanic.
Taking care of your health is of the utmost priority. A new medical treatment that is not covered by insurance has the highest ranking of emergencies. Insurance may not cover all costs and deductibles can sometimes run in the thousands of dollars.
Sudden death in the family may also bring about the costs of a funeral.
During these emotional times, the last thing you need to be worried about is how to pay the bill. Emergency funds are a source of comfort for these difficult situations.
The last recommended use for emergency funds is for unplanned travel. This does not include travel for enjoyment, such as vacations, nor does it include business trips or conferences.
Emergency unplanned travel could be a flight to visit an ill loved one or to attend a funeral. It is something serious and urgent that requires your attention and presence immediately.
The short answer to this is everyone. Emergency funds are a source of help for times you don’t expect. Nevertheless, there are particular groups of people who may be more prone to face financial emergencies. We’ll describe these groups below.
There are many discussions on whether you should use your emergency fund to pay your debt or not. While this is a personal decision, those with debt should consider keeping their emergency fund untouched to avoid taking on even more debt should an emergency arise.
Sticking to a budget is hard work, but it’s also rewarding work. An emergency fund is vital to stay on task and meet your financial needs. Without one, an unexpected expense could throw you off of your budget and off your carved-out financial path.
If your family unit’s only stream of income is through one job or if you’re an independent contractor, an emergency fund is a must. These individuals are precariously putting all of their eggs in one basket. This fund will provide a pillow to catch the eggs in case the “job-basket” disappears.
Similar to those people on a budget, an emergency fund will allow others to continue to work towards their financial goals – even if an unexpected financial hurdle comes their way.
If you’re renting your home, your landlord is responsible for major repairs. Homeowners have more responsibility under their belt and need an emergency fund to deal with things like home damage, appliance breakdowns, and more.
While health insurance can cover most major expenses, new treatments and medicine can be privatized to require individual payment. Not only that, but an illness can cause job loss too, thereby making this group of individuals the ones who may most need an emergency fund.
Emergency funds range widely in their size. Generally, people begin with a fund that is enough to cover one of the smaller emergencies listed before, like car repairs or a new large appliance. Once you establish this emergency fund, we recommend continuing to grow it.
As a general rule of thumb, most financial advisors recommend having enough money to at least cover one month of expenses should your income disappear. This means that if you experienced a sudden job loss, you could still pay all of your necessities for the next 30 days.
As you start saving more of your income, an ideal emergency fund would cover three months’ worth of expenses. This is the ultimate goal for an emergency fund cushion.
Before deciding how much you want to save in your emergency fund, you need to know how much you are spending every month. To do this, you must sit down and analyze your monthly expenses. Most of us know the general amounts we spend on monthly bills, but you’d be surprised how many dollars slip through the cracks in our mental registry.
Try writing down every dollar you spend for one week, then one month if you can. This means tracking every coffee, every gas fill-up, and every lunch out. You may be surprised at what you find out at the end of the month.
After analyzing what you’re spending money on, it’s time to reevaluate which expenses are truly necessary. If you lost your job tomorrow, would you still make that $7 coffee run in the morning? Hopefully not.
Eliminate these non-essential expenditures from your tracked expenses. The total you have left will include the things you truly need to get by. This is the total amount you will want to aim for in your emergency fund. Once it’s established, you will want to change your goal and aim for 3x that amount.
If you don’t have an emergency fund yet, it’s time to start building one up. Wondering how? Whether you’re living paycheck to paycheck or spending where you don’t need to, one of these ways is sure to work for you.
If you don’t have a budget, it’s time to create one. Follow our expense tracking guidelines above to see exactly where you’re spending your money every month.
When you realize you’re spending $100+ a month on coffee, you may want to rethink if the brand-name label is worth it. Many expenses can either be cut down, replaced, or eliminated with the right mindset and motivation.
Decide what you can live without and eliminate it from your monthly budget. Put that same money towards your emergency fund instead. Spend only what you planned for before the month began.
Your budget can always be adjusted in the future. You can cut out certain expenses, like eating out, temporarily, moving that money into an emergency fund. Once the fund is established, you can always go back to those expenses… although you may want to make them less frequent now that you know how much you can save by avoiding them!
Now that you’ve set up a budget and know how much you can afford to put into your emergency fund, it’s time to start saving. Stick to this plan and make consistent contributions until you’ve reached your emergency fund goal.
At a minimum, we suggest you continue with this method until you have at least one month’s worth of necessary expenses saved up.
More than 1/3 of Americans spend their tax return before they receive them. This is one example of spending “free money”. Any money you win, inherit, or gain without expecting it is what we call “free money.”
Even though it’s just as real as the dollars in your bank account, our minds trick us into thinking it’s extra spending money. The truth is that it could and should be extra saving money.
Any extra cent you get during your budgeting months should be an addition to your emergency fund. This will get you to your goal faster, and you’ll still be sticking to your budget.
Some people are already on a budget and don’t have the possibility of cutting any more financial corners. While it may be a challenge, an additional part-time job is a surefire way to get yourself out of the financial gutter.
Think of it as a temporary challenge; you will not keep this second job forever. For a few months of extra work and less TV, you can establish your emergency fund and eliminate potential worry from your future.
Now that you’ve set up where your emergency funds will come out of, you must set up where they will be deposited.
Emergency funds should be kept in an account separate from your daily checking to ensure you won’t withdraw from it. We suggest a high-interest savings account, potentially at a separate online bank.
Our guide provides excellent information on what an emergency fund is and how you can establish one. While your path to a financial cushion may be underway, what should you do if you have to face a financial emergency without a fund today?
Simple Fast Loans is a fully licensed financial services company with offices across the U.S, and we are here to help.
Simple Fast Loans offers installment loans, registration loans, and lines of credit to help those who need cash fast. We know how important it is for you to get your money when you need it. No matter your situation, our loans offer a helping hand during dire times.
Our installment loans can provide up to $3,000 in cash as quickly as the same day you apply. The application can be completed online in a few easy steps and you will instantly receive your loan application decision.
Once you receive your loan amount, you’ll have all of the clear details around the monthly installments required to pay back your loan.
We will reach out to you if we have any questions about your application to make sure we are meeting all of your needs correctly.
Registration loans can help you obtain up to $1,250 in cash for an emergency financial situation. With this type of loan, you use your car as collateral during the loan’s duration – but don’t worry, you get to keep your car as you use the loan!
Simple Fast Loans does not require a vehicle inspection, which makes our registration loan application process much faster than that of other companies. Your vehicle will need to be only in your name. Unlike other loan services, we do not require you to own your vehicle outright.
Not only that, but we don’t offer an early payment penalty. If you can pay off the loan earlier than expected, we support your efforts! If not, you can continue with our easy repayment periods without issue.
Another financial assistance option offered by Simple Fast Loans is a line of credit. Lines of credit are similar to a flex loan, created uniquely for you and your situation.
After applying, you’ll be given a credit limit. This limit can range up to $2,000. You may then choose to borrow any amount of money up to that limit from your line of credit.
Lines of credit have monthly cycles and due dates, much like a credit card. When you borrow from a line of credit, you only pay interest during the borrow-time. Once you pay back the line of credit, you have that same limit to borrow from again if you need to in the future.
To apply for one of our loans, you’ll need to access our site online. Make sure you have your government-issued ID and checking account information ready. You should be 18 years of age or older before applying for one of our loans.
On our homepage, select the loan you would like to apply for. Complete the application in as little as a few minutes. Should we have any other questions, we will reach out to you through your indicated phone number.
Once your application is submitted, you will receive a decision almost instantly. You will then be informed of the next step in securing your funds. Once they are deposited into your account, you can use them to take control of your financial emergencies with strength and dignity.