If you have debt, you should also have an emergency fund.
Why? Because life happens.
Still too vague? Here’s an example.
That is a picture of one of our tires. And that little silver circle is a nail. Ugh.
Buying new tires for the car was not part of our plan this summer, but it’s not like we had much of a choice. Not only is it unsafe to drive around with a tire that can’t hold air, we also had to put the car through inspection – and it would not pass with a tire like that.
Annoying? Yes. But thankfully, not a financial disaster — because we have an emergency fund.
Most people in the personal finance world agree that having an emergency fund, particularly when paying off debt, is a good idea. Even though there is less agreement on the amount, most tend to agree it’s a good idea to have some money set aside just in case.
How much should you have in an emergency fund when you’re in debt? And how do you go about saving that money? Here are four simple tips for building up your emergency fund (and some thoughts on how much you’ll want to be putting away).
Our Emergency Fund
Our emergency fund sits at $5,021.00.
We keep it in a tax free savings account (hence the $21 earned from interest), separate from our sinking funds and every day savings account.
This account reached fully funded in May 2018. We don’t touch this money under normal circumstances.
That’s not to say we’ve never been tempted – we have. For example, before scrapping our plan to go to Iceland in the fall, we considered using money from this account to fund the trip. Not all of it, of course – maybe about $500 or so to use as a buffer.
It likely would have been fine, but I’m glad we didn’t go that route. A trip, while fun and exciting, doesn’t exactly fall into the emergency category.
Emergency, by definition
The Merriam-Webster dictionary defines emergency as an unforeseen combination of circumstances or the resulting state that calls for immediate action or an urgent need for assistance or relief.
The #debtfreecommunity on Instagram often refers to these circumstances as a visit from Murphy.
For those unfamiliar with the old adage, Murphy’s Law is simple: anything that can go wrong, will go wrong.
An unexpected bill. An expensive car repair. A sudden illness. A visit from Murphy looks different for everyone. What they have in common is they often come at the worst possible time.
We had a brush with Murphy in September 2017 when our alternator suddenly died. While it was not a massively expensive repair in the end (thankfully), it was a setback. Along with paying for the part and the labour, we also shelled out cash for a rental vehicle to get us around the city – and because of the short notice, that rental car ended up being a massive, gas-guzzling truck.
Thankfully, through a combination of our car maintenance sinking fund and our partially stocked emergency fund, all costs associated with Murphy’s little sojourn were covered in cash — with money to spare.
The $1K Question
As I mentioned, our emergency fund goal is $5K. It’s one of the many ways we don’t follow Dave Ramsey’s baby steps.
According to Dave, baby step one involves saving a $1k emergency fund. Once that is in place, every other available dollar after expenses should go toward debt.
It does make sense in a way: the more money you send toward your debt, the faster you can pay off.
I’m not convinced $1K is enough for most people to cover an emergency.
A $1K emergency fund would not get us very far. A $1K emergency fund is exactly one month of rent for us — and that’s it. That doesn’t include groceries, gas, our minimum student loan payment. Just rent.
I’m not the only person who sees it that way.
Suze Orman, for example, says to aim for eight months of living expenses in an emergency fund. That makes more sense to me than $1K, especially in today’s economy.
Which approach is the right one? It depends on your situation. The question I would consider is this: would $1K be enough to cover all your expenses if you went more than a month without any income?
At $5K, we fall somewhere in the middle. If we were to find ourselves in a situation where our income was cut off entirely, we could cover all our bills for about three months.
4 simple tips for building your emergency fund
Whether you’re just getting started or if you’re almost fully funded, here are my four tips for building an emergency fund.
Pick the right amount
Only you can decide what amount is right for you. A $1K emergency fund is a good place to start, especially if you don’t have any other savings to your name. From there, you can adjust your goal as required to meet your personal circumstances.
Pick the right location
Emergency funds are for just that: emergencies. As you save, make sure you put your money in the right kind of account. I recommend one that is separate from your every day bank account , preferably one that allows you to earn interest on your savings. The important thing is to make sure you’re not dipping into this account unless it’s actually an emergency.
Make it a priority
Much like paying down debt, the key to creating an emergency fund is committing to it. This will likely require a lifestyle adjustment; maybe it means eating at home more (as opposed to going out to restaurants) or shopping your closet instead of buying a new dress for a night out. This might not be fun, but it’s important to remember it’s temporary (and, in the long run, for the best).
Generate more income
My feelings about side hustling while chasing financial freedom are complicated. But in the context of creating an emergency fund, I’m all for doing what it takes to reach fully funded. I sold items on Kijiji/Facebook Marketplace to help speed along the process. Other options could include a part-time job, offering services (like cleaning houses or mowing lawns) or looking for online gigs that allow for a flexible schedule.
As the saying goes, an ounce of prevention is worth a pound of cure. An emergency fund is like an insurance policy. No matter what amount you choose, the fact remains that some savings are better than no savings – especially when unexpected problems arise. Saving requires a lifestyle adjustment and a healthy dose of discipline, but that’s temporary – and when Murphy comes calling, it is definitely worth it.
Do you have an emergency fund?