Your emergency fund is more important than ever before as we enter into uncertain times. In this post, I’ll debunk some bad excuses for not having emergency savings, teach you what an emergency fund is (and what it isn’t), determine how much you need to save and provide tips on how to start saving in the middle of an emergency.
Last week the New York Times reported that 31% of people can’t pay the rent and the Washington Post reported that more than 17 million Americans have filed for unemployment in the last four weeks. Entire countries are in lockdown, and our healthcare systems are already overrun by the number of coronavirus cases entering into the hospitals.
Shit’s getting weird, fam. For my millennial friends, bad news abounds in the personal finance department.
We have fewer investments, fewer savings, and less overall assets than Generation X did during the last financial crisis, so what are we to do? As we enter into what may be a very long period of uncertainty and crisis, building an emergency fund for yourself is a top priority.
The Ultimate Emergency Fund Guide: Table of Contents
- Why You Need an Emergency Fund in the Middle of an Emergency
- My Big Mistake AKA What an Emergency Fund ISN’T
- Bad Argument #1: Why Should I Care About an Emergency Fund?! That’s What Credit Cards are For!
- Bad Argument #2: My Job is Totally Secure, Okay? Thanks.
- Bad Argument #3: I Could Find Another Job.
- Bad Argument #4: But I have Investments!
- What Emergency Funds ARE
- How Much Should I Save in my Emergency Fund?
- How do I Save for an Emergency Fund?
- Where should I Store my Emergency Fund?
Cue the groans.
I know what you’re thinking.
“Clo Bare, how the actual flipping fuck am I supposed to build an emergency fund when I’m IN AN EMERGENCY?!”
Fair point. But hear me out as I try to convince you to build your quick access emergency savings.
Why You Still Need an Emergency Fund When We’re in the Middle of an Emergency
If you are in a position where you still have a job but don’t have a rainy-day fund ahead, now is the time to set aside a safety net.
Perhaps you’ve been working on your financial goals that include paying down debt but don’t have an emergency savings– now is the time to put away some extra cash.
If you are in a position where your salary has been cut but you don’t have an emergency fund, now is also the time to set aside anything you can.
And if you are searching for a job, now is the time to find any type of income-producing vehicle to pay for those expenses and hopefully start saving a few bucks per pay period.
My point is, saving even a little bit even when we are in the middle of a crisis is going to help. After all, at any point ever have you looked back and said– damn. I really shouldn’t have saved all that money?
Let’s dive into the brass tax of what emergency funds are, how much you need saved, and why I care so much about your emergency fund.
My Big Mistake AKA What an Emergency Fund Isn’t
If you read my most recent blog post, “Budgeting Bare: March 2020 Spending Report”, you’ll see I had a rant– I mean section– about emergency funds and how to avoid making the same mistake that I did. What was my big mistake?
Pre-COVID-19, I thought I didn’t really need a real emergency fund and I thought my excuses were pretty solid:
- I have tons of available credit. I could just use my credit cards if worst came to worst and an emergency came up without my cash to cover it. I have a JOB so it’s not like I wouldn’t be able to pay it off.
- My job is pretty secure. There’s pretty much nothing that I can think of that would make me lose my job cause I’m awesome and I work in a needed industry. Job security is an ACE.
- I could find another job. Even if for some inconceivable reason I lost my job, I could find another job. I know people.
- I have more than $36k invested with a local real estate project. That’s basically an emergency fund even though I don’t have it accessible to me right now.
Lol. Oh, silly little pre-coronavirus Chloe nitwit. Your excuses are precious. Let’s dive into why they are wrong, my dude.
Bad Argument #1: Why Should I Care About an Emergency Fund?! That's What Credit Cards are For!
Dear Pre-Coronavirus Chloe,
That’s true– you do have credit cards. And you do have high enough limits on them that would allow you to live off your credit cards for 6+ months. In this emergency situation you’ve conjured up in your head, you still have your job and so taking on credit card debt doesn’t seem all that scary because you could pay it off in a reasonable timeframe, possibly even without paying any kind of interest.
But what if you don’t have that cushy job anymore? Will you be able to pay off your credit cards when you have no income?
Probably not. And you know what happens with credit card debt? Well, you get a big fancy 15% APR that will make paying off that credit card debt a BEAST when you do finally get another job.
Which, by the way, can take anywhere from 3-6 months when we aren’t in a coronavirus crisis.
Let’s do the math of using credit cards as emergency funds.
Your essential expenses are about $2,800 a month and your credit card APR is 15%. If you lost your job for three months, you’d acquire $8,400 in debt in that short time frame, and you’d get charged an additional $1,260 in interest alone which would bring your total to $9,660.
But let’s say it took you 6 months to find a job since we’re in the middle of an economic shutdown.
Your credit card debt would then be up to $16,800! At a 15% interest rate, that means you’d be paying $2,520 in interest making your total debt $19,320!
Even if you could throw $1,000 at your bill each month, you would be paying that credit card bill for a whopping 19 months.
So no, dear Pre-Coronavirus Chloe– credit cards are not emergency funds. Credit cards, when not used properly, cause financial emergencies that are incredibly difficult to recover from.
Bad Argument #2: My Job is Totally Secure, Okay? Thanks.
Dear Pre-Coronavirus Chloe,
I bet you think right now that nothing would make you lose your job, right? Like everything is pretty solid. The project you’re assigned to is supposed to last for another six years and nothing could possibly stop the already funded project.
So you’re good, right? Barring any world disasters occur, right?
See that’s what your pre-coronavirus lenses are missing. You’ve never experienced a pandemic before so you can’t possibly imagine any circumstances in which your, albeit generally very secure job, could possibly crumble.
The thing with this pandemic is that we have no idea how it’s going to affect the economy. None! And it’s not just the US economy– it’s the world economy. So yes, while your job still falls under essential services for now, we have no idea how that’s going to change in the coming months if the economy continues to stay halted.
In short– there are some things you can’t even begin to imagine that could happen to your job. Having one job and one income and one place where you rely on income– it’s risky business. So do the best you can to start an emergency fund, my little one.
Bad Argument #3: Ok, but even if I DID lose my job, I could find another! I know people!
Dear Pre-Coronavirus Chloe,
You live in pre-coronavirus world where you can’t imagine a world where 7 million Americans file for unemployment in a WEEK.
On average, it takes people 3 to 6 months to find a new job under normal circumstances. But under pandemic circumstances when almost all businesses around the world are hit with revenue losses and the government is issuing emergency funds to small businesses in order to pay their employees?
The reality is, if you lose your job now during a pandemic, it will likely take you twice as long to find a job that may not pay you as much as you are making now.
Bad Argument #4: But I have investments. That’s the same thing as an emergency fund, right?
Dear Pre-Coronavirus Chloe–
Wrong-o, my dear.
You may have a sizable chunk of money sitting in a real estate investment, but I hate to break it to you. That investment is an investment, which means you could lose that money. There is no guarantee that the project will be successful and there’s always a chance that your investment will partially fall through if not fully fall through.
What would you do if all that money disappeared?
Secondly, that money is not accessible to you right now. If you lost your job tomorrow, your investment isn’t due back to you until August 2020. What’s your plan for the four months between now and then? Rack up loads of high-interest credit card debt?
Not a great long term plan. Please see my answer to your first bad excuse, thanks.
What Emergency Funds ARE
Now that we’ve covered what emergency funds AREN’T (credit cards, retirement savings, and investments), let’s talk a little bit more about what emergency funds are.
An emergency fund is… drumroll, please… accessible cash for you to use in the event of an emergency.
I know you all have on your shocked faces. Shook.
It is money saved in the bank that is ONLY to be used for emergencies like unexpected expenses, loss of a job or medical bills. Not your vacation fund or your new car fund or even a pile of money that you should use to dump into a fun investment.
How Much Should I Save in my Emergency Fund?
Personal finance experts usually recommend saving at least 3 to 6 months’ worth of expenses. And we’re talking your essential expenses, the money you will need to have in your checking account to pay for things like rent, private student loans, health insurance if you lose your job, utilities, your cell phone, and food.
For example, my bare minimum expenses are:
Student Loans: $608
Cell Phone: $125
That means I need to save up between $7,938 and $15,876 to have solid emergency savings. I currently have about $5,800. Not enough for my personal risk preference.
How Much You Save Should Be Based on Your Risk Preference
However, with all this being said, how much you should save truly depends on your risk preference.
Are you okay with a lot of risks because you have a pretty solid job? Great, then maybe you only need a few thousand dollars saved up.
Worried you might lose your job and be out of work for a while? It might not be a bad idea to save six months.
Not sure how you feel about all this and not sure what makes sense for you? Think about what number will make you feel stable and comfortable. Is it 6 months? Maybe 9? Maybe it’s only a few months– either way, do what you need to do to feel okay.
How do I Save for an Emergency Fund?
Start saving now for unexpected events.
Even if you can only save $10 a pay period, start chucking that money away and know that you are in good company. Nearly seventy percent of Americans do not even have $1k in their bank account, so if you start saving even a little, you’re doing better than most people.
How to Start an Emergency Fund
- Find out how much you need in your emergency fund and make a plan to get there.
- START A BUDGET. I cannot emphasize this enough. When you have a financial goal, it is SUPER helpful to use a budget to help you get to it. Check out my post on “How to Create a Budget” to get started.
- Dedicate all extra money to hitting those goals. Tax refund? Emergency fund. Reimbursement? Emergency fund. $20 you found on the street? Emergency fund.
- If you need to, start a side hustle. Walk dogs. Deliver DoorDash food. Take surveys online. Here are a few resources that list out tons of possible side-hustles:
- Decide what you can cancel in order to get to that emergency fund goal. Remember, this should be your top priority. What can you cancel or give up for a bit to get to that peace of mind you’ll feel when you have those savings?
- Once you have a chunk of money– open a separate bank account for your emergency savings.
- Set up automatic transfers to your savings account so that you can make saving for your emergency fund easy as pie.
Where Should I Store my Emergency Fund?
Now if you have an emergency fund– CELEBRATE! … by opening a fancy new bank account to store that pretty little safety net.
Good places to store an emergency fund:
- Online banks that offer high-interest earning savings accounts
- Any separate bank account that is not in a place where you will be tempted to pull money out for a quick trip to Costa Rica
- Any separate bank account that is easily accessible in the event of a crisis but not SO accessible that you’ll transfer it into your checking account because said Costa Rica trip
Bad places to store an emergency fund:
- Retirement account
- Real estate
- Under your mattress
- In your dog’s toy crate
- In a fancy new car
- Bitcoin (don’t even get me started)
TLDR: The Best Way to Start is to Start.
Don’t let the big number that you need to save up stop you from starting. Even a little bit can help you as we continue on in these weird times. I’m learning too and wish I had had a chat with pre-coronavirus Chloe about her emergency fund. Now I’m making up for it by putting a pause on my extra payments to debt in order to crank up my savings to at least 3-months of essential expenses.
How are you Saving for an Emergency Fund During the COVID-19 Crisis?
Share your thoughts in the comments below. Have any questions on emergency funds? Leave the questions in the comments and I’ll be sure to respond!