Establishing an Emergency Fund is an essential part of being ready for what life throws at you. This post covers some of the fundamentals and outlines how you can get started today. After you complete this step, you’ll be more resilient, stronger, and better prepared for surprises in life.
Establishing an Emergency Fund to support your Family
Table of Contents
- 1 Establishing an Emergency Fund to support your Family
- 2 You Need to Establish an Emergency Fund Today
- 2.1 Emergency Expenses and Your Budget
- 2.2 Fully Funded Emergency Fund? How to get there.
- 2.3 What to do after an Emergency? (Re-Establishing an Emergency Fund)
- 3 Final Thoughts on Establishing an Emergency Fund
- 4 More, please!
Building and establishing an emergency fund is part of the core concept of Mêtis. Found throughout this blog, Mêtis is thinking strategically outside of the box. This mindset is an essential part of equipping yourself to handle your finances, especially when preparing for an emergency. Think of an emergency fund as existing to serve as an insurance policy. In the event of an emergency, it is part of being able to provide and care for loved ones. Don’t let life catch you without a plan!
What is a Fully Funded Family Emergency Fund?
As suggested in the name, an emergency fund is specifically for emergencies. While it is a simple concept, it can be more challenging to establish, practice, and maintain. A fully-funded emergency fund is there to cover extenuating circumstances beyond what the regular monthly budget line-item can address. Consider this example: if you lose your job, a fully-funded emergency fund is there to cover critical monthly expenses and keep your family afloat.
Types of Emergency Funds
When you go about establishing an emergency fund, keep in mind that it should be one that is relatively liquid and easy to access. In my opinion, one should be able to access the most liquid parts of the emergency fund in 24 hours or less, and there should be no limitations on the amount of the withdrawal. (As an example, avoid using funds that take a few days to settle or otherwise reduce your ability to withdraw the funds).
Instead, focus on basic checking, savings, or money market fund. The key is to be able to efficiently access funds when they are needed. Remember, the goal of the Emergency Fund is not “Investing” per se. Because of that, do not expect an emergency fund to generate an extremely high rate of return. Target diversity in your banking choices, low fees, ease of access, and a small rate of return if possible. Ultimately, we’ll work toward my preferred method: tiered emergency funds.
Avoid using your Emergency Fund as Savings Account
You might notice your desire to go shopping will increase as the balance in your emergency fund grows. Be careful, and establish ground rules for the fund at the beginning. That way, the good habit is already established before the emergency fund has been established. It takes discipline: do not use your emergency fund for anything other than an emergency. It is not there to “borrow” or “cover an overage” or act as any sort of “down payment” option. Avoid setting yourself up for failure!
Don’t Use Credit Cards for Emergencies
As a rule, Credit Cards make horrible emergency funds. In the middle of a proper emergency, the credit card offers only a short-term solution (liquidity) in exchange for a very painful, slow, and exponentially more expensive path through said emergency. Credit card debt is a massive problem to deal with, and I think there are other ways to survive an emergency without creating another disaster for yourself in the form of credit card debt with incredibly high-interest rates.
Keeping Cash at Home
It is smart to have cash on hand. However, I keep this balance relatively small and avoid using it unless I have a pressing case to do so. Depending on your area and logistics, and family size this amount in this category can fluctuate. Even though none of us can see into the future, try to anticipate what cash-only expenses your family would encounter in an emergency and go from there.
You Need to Establish an Emergency Fund Today
Now that we have laid some framework in place, let’s look at the practical side of establishing an emergency fund. We’ll start with our best friend, the budget, and then walk through some ways to get from 0 to a fully-funded emergency fund.
Emergency Expenses and Your Budget
A well-oiled and fully functioning budget is a critical ingredient for establishing your success story. Using that process, you can account for and manage regular cash flows. Additionally, you can use your budget to direct funds, even if slowly at first, toward your 1-year emergency fund. For most of us, this will not happen overnight. The budget is a practical application of your goals, which are derived from your vision. Here, that vision is to have a fully-funded emergency fund such that you can sustain your family (essentials only) for a 12-month period.
Fully Funded Emergency Fund? How to get there.
Let’s get after it. We’ll begin with a starter emergency fund to get things going. From there, we’ll outline the progression and growth ideas that will land you and your family with an effective financial tool and some financial peace of mind. The satisfaction of a robust emergency fund is sure to provide some financial peace of mind.
Starter Emergency Fund
In your monthly budget, as part of your regular process, establish an amount that can be directly contributed to the emergency fund. It should be automated, and it should be balanced between getting your balance to the desired level (contributing more) and yet not so big that it cripples the finances. Already tight on funds? Try starting with $20 and go from there. No amount is too small; any amount is progress! Sometimes, taking that first step is the most difficult part.
$500 Emergency Fund
I like this amount as a “first stop” and would like to encourage your family to work towards it. Using the benefit of automatic contributions (pay yourself!) do what you can to get here quickly. In today’s world, $500 will go quick! Especially in an emergency.
Try to establish the $500 as quickly as possible! I encourage you to push hard and make that happen as quickly as possible.
$10,000 Emergency Fund
Now that you’re a professional builder of emergency funds you realize getting to $500 wasn’t so hard, $1,000 was just twice that effort. Now, 10,000 should be a little less intimidating! If you’ve automated your contributions, the guesswork has been taken out of it as well. At this point, consider keeping some of your $10,000 in cash at home, start thinking about diversification as well. More on that, below.
Congratulations, this is good work so far. Now, let’s talk about the main goal and building out a tiered emergency fund. Hit this mark and then keep going, my friend!
1 Year Emergency Fund
Now that the Budget is doing its part to funnel money into the emergency fund, the question becomes “how much should be contributed each month, and how much is needed overall?” At first, the monthly contributions should be as much as you can afford. Let there be a sense of urgency in your approach. If things were a bit tight getting here, then consider adjusting spending habits and eliminating luxury items to free up cash for your 1-year emergency fund.
That said, this next tier of the Emergency Fund balance should be approximately 1-3 months of essential expenses. This ties back to the importance of the budget! From a solid budget, the next target(s) are easy to set. As a practical item, remember to trim luxury items out of your budget (for example, no going out to eat, etc.) in the event of an emergency. As such, remember, aiming for the current monthly expenses as a target measurement for the Emergency Fund likely adds a little padding.
Now, this is where it starts to get easier! Rinse and repeat. Continuing from $500, reach for $10,000. In the same way, from 1-month, go to a quarter, then from a quarter to 6-months, and from 6-months to 12-months. Again, automation will make this MUCH easier to accomplish.
Oversaving for an Emergency Fund?
This amount of time and the sheer cost for this type of plan could be a barrier for some. I think a 1 Year Emergency Fund is essential, but I don’t believe that means holding it all in cash. Too much cash, especially in times of high inflation, could be detrimental to the overall financial health of the household. Hence my preferred method of a tiered emergency fund.
Where should I store my emergency fund? What should I invest in?
Especially for this step, I recommend consulting with your trusted financial advisor to make sure your overall household allocation is strategic and aligns with your preferences. Looking for a general approach? I’ve got you covered in the next paragraph.
As a general suggestion, I recommend working towards a tiered emergency fund, with decreasing liquidity for every 3-month “chunk” you plan on using. Doing so will allow you to have a balance of cash on hand, checking accounts/ savings accounts, money markets, and CDs (certificates of deposit). This asset allocation will shift with your risk preferences, plan, and other unique factors to you and your family. However, it endeavors to provide diversification and balance overall.
What to do after an Emergency? (Re-Establishing an Emergency Fund)
In the event of an emergency, your fund is now ready for action. Take a deep breath – you and your family are prepared and are not going to create problems down the road by maxing out a credit card. Side note, as a word of encouragement, make sure the emergency is actually an emergency and save the Emergency Fund for just such an occasion. Emergency funds are not there for spending sprees!
No matter which part of your emergency fund is used, make sure you keep track, and begin repaying yourself and replenishing your emergency fund as soon as you can.
Did you use your Emergency Cash Stash?
As we’ve said, if you withdraw funds to cover an emergency, keep track of how much is actually spent so you can pay it back after the emergency. The same rule is true for your emergency onhand cash stash. Pay yourself back, and prepare for the next hurdle in life.
Here’s an example: If your emergency cash stash balance is $1,000, and the emergency is fully addressed with $200, then you should focus on paying the fund back those $200 in the following month – as a top priority! Doing so will restore the full balance and your family will be ready to weather the next event.
Final Thoughts on Establishing an Emergency Fund
Great work on completing this critical step. Keep up the drive, and the focus on developing Mêtis in all of your Money Matters. A cemented emergency fund will better equip you to handle unexpected events, provide peace of mind, financial stability, and a financially happier home. Rather than simply surviving the financial jungle, you will thrive in it!
Your Parents are NOT your Emergency Fund!
Sure, part of being family means supporting one another during hard times. I’d like to suggest that your parents should not be your default source for emergency funds. However, by using their funds for your emergency they are not assuming a larger financial burden. Instead, do the hard work and get your family set up. Our parents have already invested so much into us, this time, let’s cover our lane and do our best to provide for our own. Who knows, now that you’re more financially stable, maybe you’ll be able to help them!
Your Emergency is NOT My Emergency – Staying Calm
Emergency situations are stressful. I make this last point as a point of encouragement to stay calm, prioritize, and do your best to make the emergency fund work for you and your family. If you’re not careful, losing your cool and overspending or blowing it all for the first recommendation from a salesperson could happen. From their perspective, “your emergency is not my emergency,” and someone looking to take advantage will do so.
Emergency situations are the best times for calm, critical, creative thinking! You’ve got this.
Jake M says
Great article! I’ve heard a lot of different people say save 6 months of expenses for an emergency fund? Do you that that’s to much?
Thanks for reading! Great question. In my opinion, consider what trade-offs and opportunity costs are being made to guide your decision. I think this largely depends on the individual and on the economic conditions. For example, in a career field that is easily transferrable and in a good economy, 6 months might be a lot. Holding all that cash limits opportunities for growth and return. Perhaps a shorter span held in cash or money markets (e.g. 1-3 months) makes sense and then invest more directly in the market? That said, if 6-months is what makes you sleep well at night there’s nothing wrong with socking it away.