About a year after I finished graduate school, my grandfather passed away unexpectedly. My husband and I were exactly a year out from our wedding. I still remember getting the call as my mother-in-law and I were driving home from wedding dress shopping. I was working hard to save up for my contribution to the wedding and pay off at least one of my student loans before I said “I do.” It seemed like every dollar that came through my bank account was already earmarked and accounted for. My mom asked: “Can you come home for the funeral?”
As soon as I got back to my apartment, I looked up airline tickets. It would cost nearly $1,000 round trip for me to fly home. Wow! I called the airline to ask about a bereavement fare. They could give me flexibility on my return flight, but the price was still the price. I checked my emergency fund, which I had been slowly building since graduate school, it wasn’t enough. I wasn’t willing to sacrifice my wedding or student loan repayment goals. So I told my mom, “No, I don’t think I’ll be able to make it.”
Saying those words stung. I come from a close-knit family. I wanted to be there to support my dad. I knew that my mom would be wearing a lot of different hats in addition to dealing with her own grief. They needed me, and I needed to be with them. I am grateful my other set of grandparents called and offered to pay the majority of my flight costs so I was able to make it home for the funeral after all.
After this experience, I vowed to make my emergency fund a priority. I never wanted to be put in a position again where I had to choose between my family and my financial goals. I quickly started working toward a two-prong strategy: first, building up $1,000 in my savings account just in case something relatively small like this came up again; and second, intentionally working toward the long-term goal of three to six months of expenses saved. When I married my husband a year later, we continued to work towards the long-term goal with our joint expenses in mind.
Whether you don’t currently have anything set aside or you’re in the process of saving toward the long-term goal, here are some tips to help you build and maintain your emergency fund:
1. Evaluate Your Short-Term Needs: Begin by looking at what savings you already have that you could use during an emergency. This fund should be exclusively ear-marked for an emergency, not moonlighting as your vacation fund. Financial experts suggest having $1,000 stashed away in a savings account that you could access immediately if a relatively small emergency (like a fender bender or broken appliance) came up. If you’re single, renting a small apartment, and have a fairly minimal budget, you may need less — though I’d suggest saving at least $500. If you have children or own additional cars or property, you may need more. Take a look at emergencies you’ve experienced and let that be your guide to how much you need.
Tip: Saving up for an emergency fund never feels urgent until you urgently need the money. After establishing a realistic budget, this short-term fund should be your number one priority — it’s even more important than repaying debt or saving up for a home. Not sure how you’ll come up with the money? Check out these ideas from Savvy Savers Academy.
2. Define Emergency: The biggest mistake I’ve made with my emergency fund is using it for something I could have planned for (like moving expenses or a high tax bill). Define for yourself what qualifies as an “emergency.” For us, it’s an expense we couldn’t have planned for in advance that the cushion in our bank account can’t absorb.
Tip: Haven’t had many “emergencies”? It can be tempting to start borrowing from your emergency fund. Don’t get into this practice. To prevent my husband and me from doing this, we asked our credit union to “lock” it. This means we can only access money in this account by calling our credit union or going in in-person — no more late night online transfers to help our bank account stay afloat. Our credit union also keeps the total amount in the account hidden when we look at our online profile so we aren’t tempted to use it for any other purpose.
3. Determine Your Long-Term Savings Goal: The rule of thumb is three to six months of expenses. So, what do you need? Well, that depends. Are you in a single-earner household (aim higher) or a dual-earner household (aim lower)? Is your job stable (aim lower) or are you self-employed/full commission (aim higher)? Would it be easy for you to find another job (aim lower) or do you work in a competitive field (aim higher)? Does someone in your family have a chronic illness (aim higher)? As you can see, there are lots of things to consider. Use this money under 30 emergency fund calculator to find out how much you might need.
Tip: The easiest way to build up your emergency fund? A set it-and-forget it model of automatic savings. A few years ago, my husband and I decided to set aside about 3% of our paychecks to begin building up our long-term fund. The money gets deposited directly once a month and we don’t even miss it.
4. Invest Your Savings Wisely: You’ve set up a system to get your long-term emergency savings in place; now, where do you put it? It’s important to keep that first $1,000 (or whatever your short-term fund number may be) close at hand so you can access it immediately. We have one savings fund at our credit union that’s connected to our checking account. It may not be gaining much interest, but it’s not losing any either. For the longer-term fund, you may want to accrue a little interest on it once you have a couple thousand dollars saved. We keep the rest of our fund in a high-yield (also known as high-interest) savings account in an online bank. It’s also connected to our checking account, but it would take us a few days to get the money into our account. We are currently earning 2.07% interest on this account.
Tip: Looking for a high-yield savings account? Check out NerdWallet’s 10 Best High-Yield Savings Accounts as of June 2019. Be sure to look not only at the interest rate, but also at minimum balance requirements, any bonuses, how quickly you can transfer your money, and whether or not the bank is backed by FDIC or NCUA (for credit unions).
5. Replenish the Fund as Needed: The best way to grow an emergency fund is to leave it alone! But if a true emergency occurs and you need to access that cash, it’s important to replenish it right away. If you pull money from your short-term fund, make sure you get money from your long-term fund to fill in the gap.
Tip: Don’t have quite enough in your long-term fund yet to replenish what you took from your short-term fund? Make this your financial priority: Find ways to cut expenses or take money from other savings accounts like your vacation fund. I know it’s not fun, but you’ll be grateful to have this sure foundation back should another emergency hit soon after.
Want to dig deeper into the topic of emergency funds? Join my Date Night Club! This month I’m walking my date night couples step-by-step through the process of determining how much you really need in your long-term emergency savings fund, so you can settle on a number that you both feel good about. For just $9.99/month, I’ll provide you and your partner with a template for money date night success: icebreaker question, short video, discussion questions, and an activity. I’ll also send you reminders throughout the month so your money date night doesn’t fall to the back burner. I’d love to have you as a part of the club. Find out more today!