For the last several months I’ve helped organize a local personal finance group sponsored by The Stacking Benjamins Show. A podcast that is about finance, personal development, as well as how to live your best life and be entertained! If you happen to be located in or near the Twin Cities area of Minneapolis and Saint Paul, Please join the Stacking Benjamin Twin Cities Group!
At a recent meet up, we discussed emergency funds. We had a group discussion around the Wall Street Journal article, “The Era of Higher Savings and Bond Rates Is Still Going. Don’t Waste It.” Where we talked about the moves to make with your cash before the Fed cuts rates. It was a reminder for me to discuss emergency funds. The why, what, and how.
Life is unpredictable. In this crazy thing called life there can be chaos. There can be financial plot twists that can turn drama into a crisis. The emergency fund can be kind of like a hero in a story, that we often overlook but desperately need. It’s not just a buffer; it can be a lifeline that keeps you afloat when the waves of unexpected expenses try to pull you under. (insert awesome prog-metal Dream Theater track here) So, let’s cut to the chase and talk about why an emergency fund or emergency savings account isn’t just a good idea—it’s an absolute must.
The “Why” Behind the Emergency Fund
First off, let’s get real about the “why.” Life loves throwing curveballs—medical emergencies, sudden job loss, urgent home repairs, you name it. I’ve had an unexpected loss where my pet had passed away. The vet and cremation services was an unexpected $500! I also had a family member that had made some unfortunate decisions that lead to a DWI. There were some legal costs that were totally unexpected. An emergency fund is your financial defense against these unforeseen expenses. Without it, you’re unarmed, and at risk with your finances.
But it’s not just about dodging debt or avoiding the credit card trap; it’s about peace of mind. Knowing you have a stash of cash specifically for emergencies can reduce stress and anxiety. It’s like having a financial fire extinguisher at hand—you hope you never have to use it, but boy, are you relieved to have it when things heat up. I had my home water heater sprang a leak. The bottom was rusted out, and I needed to get a new one installed. Because of my emergency fund, it really didn’t impact us too much. We had the funds already there, and ready in case something bad happened.
Funding Your Emergency Fund
Now, onto the “how.” Funding your emergency fund can seem daunting, but it’s all about taking that first step. Start small if you must, but start now. Automate your savings—set up a direct transfer from your checking to your savings account right after payday. Treat it like a non-negotiable expense, because, in essence, it is. You’re paying your future self for a sense of security and freedom.
Cutting down on non-essentials can also free up some cash. Do you really need that daily latte fix or the latest smartphone upgrade? Probably not. You can upgrade your iPhone or Apple Watch every other year. Redirecting those funds to your emergency account can make a significant impact over time.
It is important to just start somewhere. Maybe it’s starting with $500. Then up to $1000. After a while it is a couple months of your necessary expenses. Soon you may have six months of expenses in your emergency fund to cover you if there some sort of life catastrophe. Maybe you suddenly lose your job, or there is an accident that causes medical expenses. This of it as a safety net that can catch you if there is a fall.
Where to Stash Your Cash
Location, location, location—it’s not just a real estate mantra; it applies to your emergency fund too. You want your emergency savings to be easily accessible but not too easy that you’re tempted to dip into it for non-emergencies. High-yield savings accounts, money market accounts, or short-term CDs can be ideal homes for your fund. They offer better interest rates than your typical savings account, which means your money works harder for you while it sits there, waiting for a rainy day.
It can be a good idea to keep these emergency fund accounts at another bank, credit union, or financial institution that is NOT where your other day-to-day banking happens. Out of sight, out of mind. We like to avoid any temptation to withdraw from these accounts.
Interest-ing Options for Your Emergency Fund
Speaking of interest, let’s talk about making the most of it. In the current financial climate, where interest rates have been a bit higher, finding the best place to keep your emergency fund is crucial. Online banks often offer higher interest rates compared to traditional brick-and-mortar institutions. They have lower overhead costs, and they pass those savings onto you in the form of better rates.
As we said, credit unions are another option worth exploring. They’re member-owned, which means they’re more about serving their members than appeasing shareholders. This can translate into more favorable interest rates for your emergency savings.
The Bottom Line
An emergency fund is non-negotiable in my opinion. It’s the financial security blanket that catches you when life’s stage dive misses the crowd. Funding it might require some sacrifices, but the trade-off is a solid foundation that can withstand life’s tremors. And when it comes to where to keep it, think accessibility and interest. The right account will not only safeguard your funds but also grow them.
So, there you have it—a no-holds-barred look at why an emergency fund is the unsung hero of personal finance. It’s time to give it the spotlight it deserves in your financial portfolio. Start today, because when it comes to financial emergencies, it’s not a matter of if, but when. And when that time comes, you’ll be ready to face the music with confidence, knowing your emergency fund has got your back. Rock on, financial warriors, rock on with those horns up! \m/ \m/
Great article. An emergency fund is a must!