What is an Emergency Fund?

There are many personal finance gurus out there, and they offer wildly different advice in some areas. But there is one thing that almost all financial professionals recommend – an emergency fund.

What is an Emergency Fund? | Cowdery Tax & Business Solutions

What is an emergency fund?

Before we discuss what an emergency fund is, we need to define a financial emergency.

An emergency is an expense you could not anticipate. Holiday gift-giving is not an emergency, but a leaky roof after a storm is.

Your emergency fund, then, is money you set aside to cover unpredictable one-time costs. These generally fall into the categories of home emergencies (like the roof), transportation emergencies (like an unexpected car repair), and medical emergencies (like an emergency-room trip).

In general, the more closely you budget and plan, the fewer “emergencies” you will have. You might decide, for instance, to put $50 a month into a fund for car repairs. After doing that for a while, an emergency that couldn’t be covered by that car repair fund would only happen if there was a very large need.

Why should I have an emergency fund?

Emergency funds help keep a bad situation from getting worse. Generally, there are very few “good emergencies.” When you’re in a bad situation, you don’t want the added stress of not knowing how you might fund what is needed.

You also want to be sure that an emergency doesn’t leave you in more debt, which again would compound the original issue.

Having money set aside that can be used when something goes wrong is a great investment in your family and your peace of mind.

How can I get money saved for this fund?

First of all, make sure your emergency fund money is not stored in your main bank account. It is too easy to spend down the money when it is stored in a day-to-day account, so make sure this fund is kept in a separate account, or in cash. It should be easily accessible, but not easy to spend accidentally.

If you currently have no emergency savings, even the idea of saving up $1,000 may be hard to imagine. You should absolutely make it a habit to contribute a certain amount to this fund every month, but even adding $50 at a time, it will take a while for your fund to build up.

That’s why it’s good to do an emergency fund jump-start. Using this method, you find something that can raise $500 to $1,000 in a short amount of time to kick off your savings.

Some suggestions:

  • Hold a yard sale
  • Take on a temporary part-time job
  • Sell unneeded bigger-ticket items online
  • Have a “no-spend” week where you try not to make any purchases

Strategies like these, especially when combined, can do a lot to jump-start your emergency savings.

This information is not intended as legal or tax advice. Cowdery Tax and its representatives does not offer legal or tax advice. We offer services for business bookkeeping, payroll, tax payments, and personal tax filings. We share information that is publicly available. Tax laws may change with or without notice that may alter or change the information contained in this publication.