What is an Emergency Fund?

Prices are on the rise and with everything in the world going on, more and more people are living paycheck to paycheck. This blog from Saving Money and Making Money focuses on what is and is not an emergency fund, why you should have an emergency fund and how to start an emergency fund when you are already living paycheck to paycheck.

What is an Emergency Fund?

An Emergency Fund is money that you set aside for when an emergency turns your life upside down and you need money to pay bills. A typical emergency fund is usually a three to eight month “bucket” of money that you have saved for when these emergencies might happen.

Reasons to Have an Emergency Fund

Losing a Job

Even if you think that your job is secure, COVID has taught us that nothing is guaranteed. Are your skills desirable? Is there a market out there for you to find another job right away in the same field? Would you have to take a lesser paying job to earn money and you would still need extra money to cover your monthly expenses? Having an emergency fund is something that you will need to fall back on.

Accidents

Accidents are just that, accidents. If your insurance does not cover everything to get your car fixed, you will need to have an emergency fund to fall back on to cover the difference. It is not something that you would have covered in your monthly budget.

Unexpected Expenses

The unexpected expenses that we all dread. Heat goes out and you need a new furnace, or the water heater goes out. UGH! No money budgeted for this, but it must get replaced now. Of if you have a health emergency? The emergency fund will cover this cost so you will not have to put it on your already high credit card.

Instead of Going into Debt

As mentioned above, if you have an emergency fund to cover these potential expenses, you will not have to use your credit card and rack up your debt. Most people use their credit cards and are not able to pay off the bill at the end of each month. Causing you to pay more interest each month.

Peace of Mind

What would you do if you had peace of mind and did not have to worry about where the money is going to come from to pay for these emergencies?

An emergency fund is not used for planned purchases like college, vacations, a new car, or a down payment on a house.

Now that we know what an emergency fund is and is not, how can I start one when I am living paycheck to paycheck?

Automatic Transfer

Set up an automatic transfer when your paycheck hits your checking account. Five, ten or twenty dollars to go directly into your emergency fund. Have your emergency fund go into either a high yield savings account or a money market account. This way you will have almost instant access to your money when an emergency arises.

Saving Change

You might not think that this will be a big way to save money but think again. When I was a little girl, my mom would save her quarters. She would save her quarters all year long and when we went on vacation, she would take these quarters to the bank and cash them in. With this money, we would have enough money saved to eat out on vacation (family of 6) so that she would not have to cook. Where there is a will there is a way. My husband and I both put our change in a large glass vase and when we go on vacation we go to the bank and cash it in to use as our spending money on vacation.

 There are even apps now that will help you save. The Acorns app uses spare change to help build your savings. How it works:  you go to the grocery store and spend $127.37… it will round you bill up to $128 and put that .63 into a fund that earns interest. It will do this every time you use your credit card. (Groceries, gas, restaurants, whatever.)  If you combine this with a credit card with rewards you can save even more money with cash back rewards. Find the credit cards with the best deal for YOUR spending habits at CreditCardTuneUp.com or NerdWallet.com – these sites compare credit cards, then estimate how much cash you expect back and put that money in your savings/emergency fund.

Cut Costs

Are you paying out the nose for cable services, streaming services, or some monthly expense that you do not really NEED? Cut costs and cancel these services. Look through your credit card bills or bank statements to see where you can cut back and cancel these services. Once your financial status gets better you can always re-subscribe, but most times, you realize that you do not need these and will not want to re-subscribe. There is a free app that does this for you – AskTrim.com or TrueBill.com. They will find these recurring payments and will cancel some or all of them at your request.

Savings Club

Get a group of your friends together and have everyone set savings goals. Get together and share tips on what you each do to save money. Have a group goal ($500 emergency fund) and whoever hits that goal first, treat them out to lunch or dinner. (Everyone chips in the money for their lunch or dinner, so it is not too expensive.)  When you are held accountable you tend to be 85% more likely to stick to ways to save money.

Now that you know what an emergency fund is and is not, why you should start one and how you can start putting money into an emergency fund, go at it. Just remember to reward yourself every so often. Once you have reached a goal, go ahead, and buy yourself a little something. Or if you do not want to spend money, treat yourself to soak in the tub with a glass of wine. You deserve it.

Remember, as my hubby always says, “Saving Money IS Making Money”!