Why Do You Need An Emergency Fund?

An unexpected expense can pop up at any moment. Are you prepared to pay for a blown head gasket, surgery for your dog, or replacing your refrigerator? What about a more serious issue like being evicted from your home, losing your job, or having a medical emergency? Having an emergency fund will help prepare you for such an event.

According to research done by the Pew Charitable Trusts, almost 60% of people are “financially unprepared for the unexpected.” They also found that 56% of people have worried about their finances in the past year, with lack of savings being the #1 reason they worried about money. The Federal Reserve recently found that 47% of people either could not cover a $400 emergency expense, or would pay for it by borrowing money or selling something. These numbers show that money can be a big source of worry and huge distraction in our lives.

In our lines of work, distractions can be deadly. If you are worried about money, what are the chances that you are not fully focused on reading the smoke coming from a burning building, or maintaining your situational awareness during a traffic stop, or drawing and administering the right drug at the right dose? An emergency fund provides a cushion so you don’t have to worry about how you are going to pay for an unexpected expense.

Starting Out

First, make sure you contribute enough to your retirement account to qualify for the employer match. This is free money, so never pass it up! Then, just focus on saving as much as you can. If you can only afford to save $20 per paycheck, then do it. Open a savings account and tell your employer to use direct deposit to fund your account. Aim for $1000 – this is a good starting point. Some people call this their “rainy day fund,” which will help pay for those smaller unexpected expenses.

How Much To Save

Once you’ve created a small cushion for yourself with your rainy day fund, start making it big enough to cover a serious financial crisis. First, estimate your monthly expenses. Use any number of budgeting tools out there, or simply track your spending in a spreadsheet. Include all of your debts, housing costs, food, etc. You don’t need to figure in nonessential spending, like saving for a vacation or a second home. If you need to fall back on your emergency fund, a cruise or beach house are the last things you need to spend money on.

After you’ve determined roughly how much you spend in a month, figure out how much you need to save to meet your goal. Experts say to keep enough money in our emergency fund to cover living expenses for as little as three months to as long as twelve months. How much you need to save depends on several things:

• How likely are you to lose your job?
• What is the budget outlook for your town or city? Firefighters in Lorain, OH were laid off in July (and only recently regained their jobs thanks to a federal grant).
• If you lose your job, how fast can you find another one that pays the same amount? Can you live on your spouse’s income in the meantime?
• What debts or other financial responsibilities do you have?

If you spend $2000 per month, and you decide that three months of living expenses is a good goal for your emergency fund, you’ll need to save $6000. If you save $200 per month, you’ll have your emergency fund fully funded in 2.5 years.

Where To Find The Money

It can be relatively painless to find money to put into your emergency fund. Deposit your tax refund into the account. Earmark any money you receive from a raise, bonus, or award for your emergency fund. Cut your expenses and stash the savings – here are some examples:

• Drop your cable service and switch to Netflix.
• Limit the number of times you eat out instead of cooking your own meal. It costs me $6 to eat an awesome dinner when we cook at the station. A meal at a restaurant is at least double that.
• Start shopping for food with a list and/or meal plan. It’s easier to resist buying stuff you don’t need.
• Look at your cell phone data plan. Do you need all of the gigabytes you’re paying for? I have a tiny 1GB plan, and use Wifi whenever possible.
• Cut back on your vices. Do you drink, smoke, or dip? Try reducing or eliminating your habit.

Where To Keep Your Emergency Fund

There are several places you can keep your emergency fund, three of which are listed below:

Savings Account – We keep ours in a free savings account at Capital One 360. If we need the money, it will only take a couple days for the money to transfer to our regular bank. Keeping your emergency fund at the same bank as your checking account increases the chance that you’ll spend it on something other than a financial emergency. Right now, our savings account has a .75% APY. You can compare the best online savings accounts here.

Money Market Fund – You could also keep your emergency fund in a money market fund, which invest in relatively short-term, secure debt. They are considered almost as safe as a bank account, and are also liquid, meaning you can get your money quickly. If you do go this route, know that new rules regarding asset values, redemptions (getting your money back), and fees will take effect in October 2016 that could end up losing you money. For this reason, put your money in a government money market fund, which are exempt from the new rules.

Cash – Interest rates are super low right now, so your savings account or money market fund won’t earn you much, if anything. Keeping your emergency cash on hand will earn zero percent interest, but it makes it readily available in an emergency. It also makes it easy to access for non-emergencies. You have to be very disciplined not to use it as spending money.

What About Paying Down My Debt?

Some people argue that paying off debt is more important than contributing to an emergency fund. While getting rid of your debt should be a priority, not having an emergency fund puts you in financial jeopardy. Building your emergency fund reduces the chance that you’d have to borrow (and increase your debt) to cover an unexpected expense. Pay at least the minimum due on your debts while you get your emergency fund started. Then, start aggressively paying down your debt.