Unless you've been living under a rock, I'm sure you've heard the conventional wisdom that you need an emergency fund.
And of course it makes sense to save for a rainy day. Yet life gets in the way, the normal bills continue to pile up, and emergency savings gets pushed to the back burner. In fact, according to a recent survey, only 39% of Americans could cover a $1,000 emergency expense without dipping into credit cards or some other form of debt.
It makes sense – we tend to prioritize expenses right in front of us instead of the unknown ones of the future. But when the future unknown collides with present reality, it can create a lot of undue stress if you aren't prepared.
Emergency Fund Examples
So what are some examples of situations where an emergency fund is a necessity?
1. Car Expenses
This is the probably the most common “emergency” that is always right around the corner. Whether you get in a wreck and have to pay for expensive repairs (or a $500 or $1,000 insurance deductible), or get a flat tire, almost everyone has to deal with unexpected car expenses a some point.
Having a healthy emergency fund can help you weather the storm and not have to run up your credit card and deal with the stress of paying off the debt for months.
2. Surprise Medical Emergencies
When a medical emergency happens, the last thing you think about is how you're going to pay for it. Even if you have amazing insurance, most policies these days make you cover several thousands of dollars in expenses out of pocket before you hit the deductible.
Saving money in both an emergency fund and an HSA (Health Savings Account) specifically designed to cover medical expenses can be a wise move.
3. Major Home Repairs
Owning a home is great, but when it comes time to replace the roof or the HVAC, it can get expensive. Even if the major systems are in good shape, it seems like every few months some unexpected expense comes up that costs us a few hundred (or few thousand) dollars to fix.
Technically, saving for large capital expenses like a new roof or water heater should be a part of your regular budget, not your emergency fund. If your water heater is 23 years old and develops and leak, was that really unexpected? It's a good idea to have a separate fund set up to save money for the large, irregular (but expected) home maintenance items. That's just part of homeownership.
But then there are the unexpected emergencies that come up. For example, if a tree falls on your house in a storm, that is something that needs to be taken care of immediately, and having an emergency fund can give you peace of mind.
4. Unexpected Tax Bill
With all the tax code changes seemingly every year, many people are unsure how much they might owe.
While this can affect anyone, if you are self-employed, get income from alternative sources, or itemize deductions this is more likely to be a potential issue.
Depending on how complicated your business and tax situation is, it can be a good idea to set aside reserves in case you get an unexpected tax bill.
5. Last Minute Travel
If a friend or family member in another state gets unexpectedly sick, or even worse there is a death in the family, planning for travel and scouring the internet for cheap plane tickets goes out the window.
Booking a flight last minute is notoriously expensive, and you don't want to have to worry about whether you have enough money to be there for your loved ones in times of need.
Hope for the best, but plan for the worst – this is exactly the kind of situation an emergency fund is designed for.
6. Job Loss
This is the big emergency fund example, and the reason so many personal finance gurus advocate for 3, 6, or even 12 months of expenses saved in an emergency fund.
No one ever plans to be laid off from their job, and depending on you career path and economic conditions it could take awhile to find a new job. (Although there are some simple ways to land a new job quicker than the competition such as by making your resume stand out.) While government unemployment assistance can help, it's rarely enough to cover all the bills.
How much you need to save in your emergency fund in case of job loss really depends on your confidence in being able to find a new job or other way to cover your expenses.
- If you are in a highly volatile industry (e.g. tech startup), or if you have a commission-based income that swings wildly month-to-month, it probably makes sense to have a substantial amount saved.
- If you are in a stable field with a highly in-demand skill set, you can probably get away with saving less.
7. National Emergency
While admittedly rare, in case of a national emergency such as a natural disaster, war, or something else unforeseen, having an emergency fund could be a life-saver. As we have seen with the sudden eruption of conflict in Ukraine, no one is immune to large-scale disaster.
If you are truly thinking about saving for a national emergency, you should also consider how and where to keep that money. For example, in a large-scale political collapse, will fiat currency such as the dollar be worth anything? Maybe not. It may be wise to keep some money in precious metals such as gold and silver coins that tend to be worth something regardless of who's in charge.
How Much Emergency Fund Savings Do I Need?
The point of these examples is not to scare you into stashing deposits of gold all over your backyard Ron Swanson style.
Everyone's situation and level of risk tolerance is different. The general consensus advice based on the emergency fund examples is you should have 3-6 months of living expenses saved in an emergency fund.
That is a noble goal, but if you are just getting started with your emergency fund (see statistic above that most people don't even have $1,000 saved), then I would encourage you to start small.
Start Small – Save $1,000 in an Emergency Fund
Dave Ramsey recommends starting with $1,000 which is a reasonable initial goal. This could cover many small emergencies such as a car repair, doctor visit, or home repair.
If saving $1,000 sounds like a mountain to climb in itself, take it step by step. There are lots of ways to save (or make) an extra $1,000 that you probably haven't thought of, such as:
Where Should I Keep My Emergency Fund?
You need an emergency fund, but where to keep it? Under the mattress? Invested in pork belly futures?
Since you need to have relatively easy access to the money in the short term, investing it in the stock market (or pork belly futures) is too risky. It is not uncommon for stocks to rise or fall by 20% or more, and you don't want that kind of volatility in your emergency fund savings.
On the flip side, you usually don't need immediate access to cold hard cash, so keeping it in a jar in the closet will only serve to devalue it over time due to inflation.
One idea for a good place to keep your emergency fund savings is in a high-yield online savings account. This serves two functions:
- It is just difficult enough to access that you are not as tempted to tap your emergency fund for non-emergencies. Usually it takes a couple days to transfer the money from an online savings account to your personal checking.
- You can earn extra interest on your money until you need to access it. Most traditional banks offer you a ridiculous 0.1% interest rate, but if you put your money in an online-only bank like Ally or CIT Bank you can earn a much higher interest rate.
Find Financial Stability with an Emergency Fund
While you can't plan for every scenario, we covered some of the big emergency fund examples:
- Car expenses
- Medical emergencies
- Home repairs
- Unexpected taxes
- Last minute travel
- Job loss
- National emergency
The important thing is to have a plan in place if there is an emergency. In the medical world, professionals are trained on CPR hoping to never have to use it. But if something happens, they are prepared to deal with the situation.
In the same way, your emergency fund is a tool that you hope to never have to use. But if you do, you are prepared and have the peace of mind knowing that you are ready for any financial emergency.
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Andrew is the founder of Wealthy Nickel where he writes about all things personal finance. He has a passion for helping people pursue financial freedom through saving money, making money, and building wealth. Andrew documents his family’s journey to financial independence through side hustles while raising 2 kids on a single income