What’s an Emergency Fund?

If you’ve spent much time reading personal finance literature and websites, or watched a couple of episodes of any of the modern day television gurus on the subject, you’ve probably run into the term ‘emergency fund’.  If you’ve had an questions on what an emergency fund is, why you need one, how to set one up, or anything else, this series is for you.

The term ‘emergency fund’ itself is a relatively new one.  Not too long ago, if someone had any money left over at the end of the month this went into an account (or cookie jar) simply called ‘savings’ or maybe ‘rainy day fund’.

Wait.  I thought the pig was the umbrella...
Wait. I thought the pig was the umbrella…

The idea of the emergency fund is to portion off some of your savings specifically for some unforeseen future emergency.  This money would be kept fully separate from savings you might use for other goals like going on a trip, buying a house, or retirement.  Ideally it would be kept in a separate account or even a different bank just to further remove the temptation to use it for anything other than emergencies.

What qualifies as an emergency?

Any unexpected large expense that isn’t a recurring cost and that cannot be avoided would be an emergency. Good examples of emergencies include:

  • Replacing a broken engine for the car you need to get to your job
  • Fixing the collapsed roof of your home
  • Repairing your broken arm, or a backed up septic system
  • Losing your job
  • Paying for travel or lodging to attend a family funeral

Bad examples of emergencies include:

  • Taking a vacation
  • Buying a new luggage set, even if on super sale
  • Upgrading your smartphone
  • Getting a 2nd spoiler for your car
 Do you need an Emergency Fund?

If you have so much money that no surprise expense could phase you (think of your favorite billionaire) or are so popular that anyone would extend you credit or give your anything you need for free (think of the person that invented beer or cured polio), then you might not need an emergency fund.  If you aren’t swimming in money and have to pay your own bills then an emergency fund is not only a good idea but something you should do today, now.

Next:  How Do I Set up an Emergency Fund?

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