Do I Need An Emergency Fund?

Surprise! Your car just broke down and needs $1500 worth of repairs. Do you have the cash available to fix it today so you can get back on the road? Or will you be asking a friend to front you the cash and you’ll promise to repay them?

Having an emergency fund saved up can be a lifesaver in moments when you least expect it. The best place to leave your emergency fund is in a savings account that earns interest. The idea is to keep the funds set aside and not touch them until you really need them. This isn’t a “rainy day fund” or an “I-found-this-great-purse-I-have-to-have” fund. It’s an EMERGENCY fund that should sit until you really need it!

Why Can’t I Just Put It On a Credit Card?

You can! That is, if you want to pay up to 30% interest in addition to your emergency. As of the date this blog was written (August 2023) the average interest rate on credit cards is 24%. TWENTY-FOUR PERCENT. Let’s break this down…

Credit Card rates are expressed as Annual Percentage Rates (APR). This is the cost of borrowing a sum of money for an entire year. To make math easy, if you borrow $1000 at 24% APR and you keep that $1000 balance for the entire year, you will end up paying $240 in interest.

If you put $10,000 on your credit card with a 24% APR and keep that balance for an entire year, you will pay $2400 in interest!

You might be thinking that if you had a $1000 emergency and had to put it on a credit card that you’d pay it off before the end of the year. That’s fantastic! But interest starts accruing only a few weeks after you make the purchase. So even if you pay it off asap, you’ll still be paying some of that interest. Don’t make the emergency more expensive than it already is!

Okay, I’m Convinced. How Much Should I Save?

The optimal amount to save is 3x the amount of your monthly expenses. If you happen to lose your job, that gives you 3 months to find a new one! Included in those expenses should be your fixed expenses (the ones that don’t change), such as the mortgage or rental payment, your car payment, utilities, etc. You should also include variable expenses (the ones that change) such as how much you may pay in gas, groceries, and potential medical expenses.

The idea is to make sure that an emergency doesn’t set you back. House repairs, car repairs, emergency medical bills, and emergency pet bills are all examples of things that you might not see coming and haven’t budgeted for.

Do yourself a favor and set aside money for an emergency fund; when that bill that you weren’t expecting hits you, you won’t regret having the cash to cover it!