The Importance of an Emergency Fund

All too often we can become comfortable in our surroundings and forget that bad things actually do happen to good people.  When something bad finally does happen, are you prepared with an emergency fund to help you get through the tough times?  Hopefully so as an emergency fund should be an essential part of every household budget.

The Gatlinburg Wildfire

The necessity of having an emergency fund hit home in several ways this past week for myself as the historically devastating widfire that hit the Great Smoky Mountains National Park and the cities of Gatlinburg and Pigeon Forge, TN and made national headlines for all the wrong reasons.  (My family is completely safe and we live about 45 minutes from the fire).  So far, it has left 14 people dead and 134 injured so far.  Not to mention the 1,000+ homes and businesses that either burnt down or damaged.

While there were wildfires in the vicinity for several weeks prior, they had not come close to endangering any city.  Unexpectedly hurricane like wind gusts of 87 mph arose and quickly made the fire get out of control.  Many people didn't have time to prepare to evacuate and literally hopped in their vehicles and escaped.  Even then, several of the rescue shelters had to be relocated a time or two because of the spreading smoke and fire.

As many travelers have at least heard of Pigeon Forge, Gatlinburg, the various Dolly Parton attractions, you can imagine that this fire has a huge impact on the local economy.  The city of Gatlinburg itself only has 4,000 full-time residents, but, the city is overwhelmed with tourists virtually year-round helping make Sevier County earn the distinguishment for collecting the most sales tax in Tennessee each year.  Fire has damaged about half of the city and has left many people homeless and jobless as the area rebuilds.

Many churches, businesses, and communities have donated supplies and Dolly Parton has pledged $1,000 per month for 6 months to those affected.  While this goodwill is an essential lifeline to help these families, many people lost everything they owned.  This is why an emergency fund is essential.  To help prepare for the unexpected.

What you need to know about emergency funds

Most experts suggest having 3 to 6 months of basic living expenses in cash reserves that are readily accessible in case you need to quickly need it as this is the average amount of time needed to find an equal replacement job, as this is usually the most probable reason a fund might need to be used.  Unfortunately, most people cannot afford a $1,000 emergency.

Referencing the Gatlinburg fire, multiple families lost their jobs and homes in a matter of hours.  Others lost one but not the other.  Jobs and a place to sleep are very valuable blessings that we all think of as “terms of endearment” until you need to find another one.  They are able to receive temporary assistance at the moment, but, life eventually needs to return to normal and it takes money to do so.

How to start an emergency fund

If you are one of those that would struggle to find enough spare change to pay for a $500 or $1,000 emergency, do not fret.  Here are several ways to boost your emergency savings starting today!

  • Create a “No-Touch Account”

My wife & I pay our bills from one bank account and we keep our emergency savings in a separate bank account that isn't linked to our credit cards.  We personally keep ours in a Capital One 360 high-yield savings account that earns a higher interest rate than a traditional bank savings account.  For all intensive purposes, this account is “out of site, out of mind” and we use it so infrequently, I can't even tell you the exact balance of it (unlike our checking account).

  • Create automatic withdrawals

The hardest part with funding an emergency fund is remembering to put money in it.  Our fund gradually accumulated in size through regular monthly contributions.  I have it setup where Capital One will automatically withdraw $100 each month from our regular bank account where we deposit our salaries.

Just like you make sure to pay the electric or water bill each month to continue receiving service the next month, scheduling automatic withdrawals on payday might be the easiest way to fund your account.

  • Sell your old junk

If you are like us and just about everybody else that lives in North America, you have a closet (or garage) full of stuff you never use.  Selling any items of value and putting those proceeds in your emergency can be a one-time way to access some quick cash.  This is one reason why I sold my dream car.  Needs and hobbies change with age and it's okay to “declutter” for the right reasons.

Improper Uses of an Emergency Fund

no-swimming-sign-1445168-639x637 Once you have money in your emergency fund, the next challenge is managing it and determining what is a true emergency or something you should save for instead.

Here are a few scenarios of when you might consider using your emergency fund:

Example #1: Your car needs new tires that will cost $500 to replace.

Q: Should you use your emergency fund?
A: No.  While many people keep driving high-mileage cars because they are paid for and have lower insurance rates, one tradeoff is that they need more repairs than a brand new car.  Certain automobile expenses, such as tires, occur every few years and need to be saved for.

If you are involved in a car accident and need to buy a new vehicle or make some expensive repairs, this is when using an emergency fund is acceptable.  Nobody plans to get into an accident when they get behind the steering wheel each day, unless they driving to participate in a demolition derby.

Example #2: Your child falls from a tree and breaks their arm and needs medical attention.

Q: Should you use your emergency fund?
A: Yes.  You might need to pay the bill before you are reimbursed by your insurance provider.  Regarding medical expenses, it wouldn't be a good idea to use your emergency fund to pay for braces or contact lenses.

Example #3: Your receive a water bill that is $100 higher than normal becuase of a leak.
A: Possibly.  We all receive “surprise” utility bills from time to time.  This example happened to us this past Friday as we received our water bill that was about $100 higher than usual and meant our leisuraley weekend plans were changed to digging holes along our 800-yard driveway looking for a water leak of 2 gallons per minute.  We finally found it Sunday evening after finding a smaller leak on Saturday.  🙁

We budget $50 per month to cover our normal monthly water bill.  This bill was for $146, plus we are two weeks into the current cycle, so we will have another elevated bill this month.  We will pay from this bill with our regular savings because it is small enough.  Typically we like to only draw from our emergency fund for expenses larger than $500.  For this expense, we will try to cut an expense from somewhere to offset the difference such as not going out to eat & buying fewer treats at the grocery store.

Example #4: Your dream vacation to Hawaii will cost $5,000.
Q: Should you use your emergency fund?
No.  Vacations are not unexpected expenses and need to be planned for through the year like Christmas shopping.  While I wish I could travel to elite tropical resorts or an Aspen ski chalet each vacation, our household budget normally only allows us to drive and stay at budget hotels or split a rental house with other family members.  If you get hurt, sick, or need to evacuate during your trip, that can be a legitimate reason to draw from your emergency fund.

What happens after you use your emergency fund?

If you have to pull from your emergency fund, priority #1 is making sure you & your family is okay and that the emergency has passed.  If so, you should try to replenish the fund as quickly as possible.  If you simple had to shell out some cash until the insurance company can reimburse you, place the funds directly into the emergency fund again.

Otherwise, dedicate a portion of your monthly income to restore the balance to its previous amount.  Make baby steps for funding to help keep the motivation level up.  Start with $500 or one month's living expenses.  Eventually it will snowball into a much larger amount sooner than you realize.

Josh founded Money Buffalo in 2015 to help people get out of debt and make smart financial decisions. He is currently a full-time personal finance writer with work featured in Forbes Advisor, Fox Business, and Credible.