The Importance of Having Emergency Funds

Sometimes, life can put us into situations that are difficult to navigate financially. Those situations are made worse, though, if your family does not have the financial reserve to cope with them. Financial stability starts with creating an emergency fund. Once you establish your emergency fund, fixing a roof or dealing with temporary unemployment will become less daunting and more manageable. 

An emergency fund is a set amount of money that is to be used specifically in the case of an expensive emergency, like covering family expenses after losing a job or needing to pay for unexpected medical or dental procedures, home or vehicle repairs not covered by insurance, or unplanned travel expenses. Emergency fund money is for immediate needs and not for something we simply just want. This money should not be used for expected expenses such as car maintenance (you should budget separately for these type of expenses). 

HOW MUCH MONEY SHOULD YOU HAVE IN AN EMERGENCY FUND?

This number is different for every family because it is determined based on your family’s living expenses. Experts generally suggest that you keep at least three to six months of living expenses in the account. And how do you count your living expenses? They include all your essential bills: rent or mortgage, utilities, food, insurance, transportation, debt payments, and for some it may also include things like childcare or medication. Saving up for date nights, vacations or eating out would not be a part of this budget. 

Tailor the amount of your family’s emergency fund to your family’s size and circumstances. Some families are in unique situations that will require them to have an emergency fund with eight to ten months’ worth of living expenses. 

Here is a list of situations that would warrant larger cash reserve:

• Having children and/or caring for an elderly parent—your expenses are automatically higher
• Working in an industry with higher unemployment rate and frequent layoffs
• The amount of money you earn every month is different —freelancing, contract work, commission as compensation, etc. 
• Your family’s method of investing—if you rent out properties, you need to have large safety net in case the renters do not keep up their end of the bargain or if significant repair expense arises
• You or your family member has chronic medical condition—you need to budget for unscheduled visits to emergency room

HOW TO START AN EMERGENCY FUND

1. Calculate your family’s living expenses for at least three months (factor in extra if your family circumstances warrant it)
2. Determine how much you need to save every month or from every paycheck. Set a realistic goal. 
3. Set up a recurring payment from your checking account to your savings “emergency” account. Making your money move automatically will prevent you from spending it. 
4. Tip: use your tax refund to quickly grow your emergency fund 

If you have debt that prevents you from using the money for emergency savings, start by creating a rainy-day fund ($500-$1000). This may be more attainable at first. One thing you don’t want to do is neglect your debt payments—this will only make the debt bigger as the interest accumulates. Rainy-day fund will alleviate your financial stress by covering for minor emergencies without having to miss payments on your debt. Once your debt is paid in full, focus on growing your emergency savings fund. 

EMERGENCY FUND TIPS

• Keep your emergency fund away from your other finances. Try to find a high-yield savings account where you can store your money to grow and still be easily accessible
• When you save up the desirable amount of money for your emergency fund, you do not need to add more money to it unless your family situation changes, in which case you decide that you need a larger fund
• If you must use your emergency fund, replenish it as soon as possible 
• When your emergency savings are fully funded, create a rainy-day fund for smaller infrequent but expected costs such as new tires or vet bill. Rainy-day funds typically hold between $500-$1,000. 

Have family discussions about finances covering topics like emergency funds and insurance. Talk about emergency situations that may arise and be financially prepared to deal with them. Having an emergency fund could prevent you from having to take out high-interest-rate loan or put large expenses on your credit card. Having emergency funds is like a personal insurance policy; you have a pool of reserve money that can cover this type of cost, and you don’t have to pay for it out of your regular household accounts. Having life, medical, and car insurance can also protect you financially if the unexpected occurs. 

Navy Mutual is a great source of financial knowledge. Their mission is to educate members, military, and uniformed service community at large on matters of financial security. They also provide life insurance and annuities to military families. For more information about Navy Mutual and their services, call 800-628-6011.

This article was originally published on Navy Mutual’s website: https://www.navymutual.org/

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