We’ve had our share of emergencies in our house. Anything from medical to mechanical to household messes; we’ve had them.
Before we started a budget, we’d simply swipe our debit card in the case of an emergency and hope we had enough money to get us to the next paycheck.
That can get scary. Especially if it’s not a small $100 emergency (are any emergencies that small?).
Then, we got serious with our money. On top of budgeting and paying off debt, we knew we needed to be proactive in cases of emergencies instead of reactive.
So we created an emergency fund.
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What is an emergency fund?
It seems simple, but emergency funds can look different to different people. Yes, it’s technically a savings fund that you have in case of an emergency. But it’s important to understand what an emergency looks like for your family, since it can look different for others.
For example: my car came to a grinding halt on a busy street at 5 o’clock rush hour on my way home from work. I was embarrassed, since it was the transmission and therefore wasn’t moving out of the street.
I needed that car to get to and from work. And my area does not have local public transportation, so I couldn’t save up over time to get it fixed. I had to fix it now.
In that case, it was an emergency to get it fixed so I could get to work.
But that could look different for someone who has the option of taking public transportation until they can save up. Or a family that has two cars and could be a little inconvenienced by sharing one vehicle until you can save up for the other car to be fixed.
Even though the car trouble could seem like an emergency for almost everyone, it might not constitute spending the money right then and there.
So it’s important to figure out what constitutes as an emergency for your family. No need spending the money you saved up for a real emergency on something that can be saved up for on the side instead!
How much should I save?
This will probably be a touchy subject. Because what works for my family might not work for yours! But hear me out on our strategy.
We follow Dave Ramsey’s principles. We used his baby steps to pay off $100,000 in debt and know his principles work. Ramsey says to save up $1,000 in a starter emergency fund (baby step 1).
But that doesn’t sound like enough!
That’s kind of the point. Having that smaller emergency fund lights a fire under you to finish baby step 2, which is paying off all of your debt except the mortgage. You fight your way through as quickly as possible so you can get to baby step 3, which is saving a much more comfortable emergency fund. Ramsey suggests saving 3-6 months of expenses in baby step 3.
This is what works well for our family, but it may not necessarily work for yours. If you feel you need to skip straight to 3-6 months of expenses, then that’s what you’ve got to do. It’s important to remember that saving that much will prolong the debt payoff process, if that’s applicable to your family.
What if my emergency costs more than I have saved?
That’s the big question! Ramsey covers it really well here, but let’s talk through it together too.
There are some big emergencies that a smaller emergency fund just can’t cover (like if you get laid off from your job or get a huge ER bill). In that case, everything else needs to either come to a grinding halt or slow way down so you can take care of your family.
If you got laid off, stop paying extra on debt and saving up for things, and scrimp anywhere you can. Look for whatever part-time work you can find until you can get back on your feet.
If you had a medical emergency, see if you can talk to someone about reducing the debt or getting on a payment plan.
Simply put: if your emergency costs more than what you have saved, it’s time to hunker down and go down to bare essentials in your budget. It may mean taking on extra work too, but remember: it’s temporary until you can get it taken care of!
Do you have an emergency fund? Have you had to use it, and how did you rebuild as quickly as you could?
I’d love to hear from you in the comments!