How to Build Your Emergency Fund
Building and maintaining an emergency fund is important no matter what stage of life you’re in. A safety net for the unexpected loss of property, temporary losses of income, and local emergencies is a wise way to steward your resources and ensure you are prepared no matter what life throws at you.
Why is an Emergency Fund Important?
With financial independence comes a financial responsibility. Even if you have always done well, there is a chance that you could lose your job due to no fault of your own. The COVID-19 pandemic, for example, taught many people that the future is uncertain and that there is always room in your budget for savings.
How Much Should You Have in an Emergency Fund?
Typically, banks and financial advisors suggest saving three to six months’ worth of income for your emergency fund. This ensures that if you were to lose your job, you could survive for a few months while looking for the next job. However, there are other considerations to think about, such as expenses you will need to cover including your home, vehicles, natural disasters, unexpected medical bills, and other emergencies not related to income loss. Your debt to income ratio can also affect how much is needed for an emergency fund.
Benefits to Having an Emergency Fund
While everything seems to be going well, you can be lulled into neglecting or pulling back from emergency savings But it’s important to remember the benefits of having an adequate emergency fund:
- Having an emergency fund protects you from pulling out of retirement accounts or selling assets in order to pay bills
- Using your emergency savings prevents you from going into debt
- Building an emergency fund requires discipline — a great habit to cultivate in all aspects of your financial life
- Emergency funds give you security in uncertain times
- Emergency funds give you peace of mind, which can improve your quality of life and even the quality of your relationships–relieving financial stress in the event of an unexpected loss
When Is It Okay to Take from Your Emergency Fund?
Emergency funds are made for emergencies only — things that require immediate attention and that will compound uncontrollably if not addressed. Medical bills, major home repairs, and unemployment are true emergencies that you cannot escape and are preferably not paid off with a credit card or loan. You don’t want to take away from or spend your emergency fund on:
- A dream vacation
- Using funds for a loan/debt
- An unnecessary purchase like a luxury car or boat
Instead, ask yourself these questions to determine whether something is a genuine emergency:
- Do I have to pay for this in order to maintain my health/standard of living?
- Can this expense wait or does it need to be paid right now?
- If I go into debt for this purchase, will I be able to easily and quickly pay it off?
How to Talk to Your Spouse about Emergency Funds
If you’re married and both contributing financially, you should talk to your spouse about building and maintaining an emergency fund. You need to determine what your goal is, as well as how much you’ll both contribute and when it’s okay to pull money out. This is a delicate conversation and will likely require compromise, but by having a set expectation you can reach your emergency savings goals quicker.
Can Your Investments Work as an Emergency Fund?
One of the biggest temptations is to put your emergency funds toward investments in order to grow your wealth. By keeping it as liquid cash, you actually risk losing value due to inflation and rising costs of living. However, investing your money doesn’t offer the ability to access your money right now, which is exactly when you need it in an emergency situation. Investing your emergency fund is most feasible if:
- You have a stable job and are unlikely to suffer a significant loss of income soon
- You have other means of earning an income other than your primary occupation (a side gig or passive income)
- You have insurance to cover bigger expenses
- You have a high credit card limit and can pay off a high balance with disposable income if circumstances are tight
How OneAscent Can Help You
OneAscent believes in creating financial wellness for our clients. While we primarily focus on your investment portfolio, we can help you determine how much to keep in the bank for true emergencies, and how to maximize your investments for the future.
To learn more about your options, talk to an advisor today so we can develop your custom plan for financial freedom.