Why You Really Don’t Have an Emergency Fund

My emergency fund is my peace of mind. I can sleep better at night, because I have it. I don’t worry too much about unexpected repairs, job loss, or medical bills, because I know that I have set money aside to cover these expenses. I honestly can’t imagine the stress and worry that I would have if I didn’t have my emergency fund, which is why I was shocked to discover that 69% of Americans have less than $1000 in savings. This could also contribute to the $5,700 average credit card debt per American household.

So, what is an emergency fund? An emergency fund is an account that can be readily available to use in an emergency. It’s basically a safety net to cover things like a job loss, medical expenses, or major repairs. By having an emergency fund, you don’t have to depend on high interest credit cards to fund the expenses, and it provides a sense of financial security. It should not be used to buy a new car (you should have a separate car fund), go on a vacation, or pay for every day expenses.

How much should you keep in an emergency fund? The amount in your emergency fund is largely dependent on your individual situation. It depends on job security, whether your income fluctuates, and your monthly expenses. Most financial experts agree that having 3-6 months of living expenses is sufficient. If your income fluctuates, or you are a one-income family, you may want to have a little more. If your monthly expenses are considerably less than your income, you may be able to get away with a lot less.

Where should you keep your emergency fund? Since an emergency is generally unexpected, and requires you to access your account immediately, you will want to keep your emergency fund in something liquid like a savings account or maybe a money market fund. I wouldn’t recommend having it invested in stocks, even though stocks are considered liquid, because you may be forced to sell at a loss.

So why don’t most Americans have an emergency fund? Although this isn’t the case with every single person, most Americans don’t have an emergency fund because they do not budget, and they do not live within their means. I have heard people complain about money issues, and then shortly after, mention their cable bill was due soon. This may be a shocker, but cable is not a necessity. Cable is not like water or electric. You can do without it, and you absolutely should if you are in debt or do not have a fully funded emergency fund. I have a fully-funded emergency fund, and I still do not have cable. I have also sat with people complaining over money issues as they scrolled through facebook on their brand new iphone. Again, a phone can be considered a necessity, but the latest smartphone is not. You should not be buying or financing an $800 phone if you do not have a fully-funded emergency fund.

The fact is that most people would have a fully-funded emergency fund if they had self-control, and could delay instant gratification. The reality is that they had the money at some point, but spent it, whether it was on coffee, the latest iphone, or even cable. Then when an emergency arises, such as a medical bill or a car repair, they are left borrowing money from family, charging it on a high-interest credit card, or taking out a personal loan. Here’s the deal, most of these are not unexpected. We can absolutely expect at some point in time we will need to make a car repair, a house repair, or have an illness. Do yourself a favor, and build your emergency fund. You will sleep better at night knowing that you have one, and when an emergency does arise, it’s more of a nuisance instead of a crisis.