We’ve talked about emergency funds before here at Everyday Money, but there’s always more to cover. And honestly, you probably already know that it’s a good idea to have an emergency fund to help prevent an unexpected event or crisis from totally upending your finances.
But how important is an emergency fund really? If you’re living fairly comfortably with a little extra cash left over each month and a good credit rating, is it necessary to build up a savings account? Alternatively, if you’re living paycheck to paycheck each month, is putting a few dollars in savings each month really going to make a difference?
Yes! Any level of emergency savings is better than no savings at all. And even if you’re in a comfortable place financially, you can still benefit from having a safety net.
Do you have an emergency fund?
Have you ever read a story about a wealthy person who ended up declaring bankruptcy? Or a seven-figure business that somehow folded a few months into a financial crisis (like the pandemic)? Many of us hear those stories and wonder how it’s possible that a person or company with such high financial assets ended up losing everything.
There’s not one universal answer, of course, but in many cases, one of the contributing factors was a lack of savings. When a financial crisis hits, you often need immediate access to money to pay bills or cover the unexpected costs of something like a home repair or medical emergency.
So having a lot of money tied up in real estate, the stock market, retirement funds, or investment accounts doesn’t really help in an emergency because you can’t access that money immediately.
When you have an emergency fund, though, it gives you a little breathing room. You might not be able to cover all the costs with your savings, but when you have enough cash to cover the immediate needs, you can buy yourself a little time to figure out the best course of action.
Lowering your risk in an uncertain economy
How much should you have in your emergency fund?
There’s not a specific number — it’s more like “as much as you can realistically save.” We know it’s not possible for everyone to save up half a year’s worth of living expenses.
But the point is that you can never predict what’s going to happen in the future. And having a little extra cash saved up can give you the time and space to deal with a financial emergency without immediately going to your credit cards or getting a loan.
Should you invest or save?
Everyone’s financial situation is different, which is why we don’t usually offer cookie-cutter advice here at Everyday Money. And it’s also why we don’t set a hard-and-fast rule here either. But in general, it’s wise to have some sort of savings tucked away before you start to invest.
That doesn’t mean you can’t contribute to a retirement fund unless you’ve saved enough for six months of living expenses. Or that your emergency fund has to match an arbitrary number, like $10,000, before you can invest.
But we’d recommend saving up at least a small rainy-day fund before you start doing so. It’s just practical — if something unexpected happens (and it probably will), an emergency fund allows you to deal with the immediate financial issues before figuring out a long-term solution.
If you’ve got healthy investments but no liquid savings, you don’t have the same kind of safety net. So if you’ve got a little extra money in your budget each month, and you don’t have an emergency fund yet, start saving. And once you have a solid amount of money in that savings account, you can start to look at potential investments.
An emergency fund makes you resilient
There’s no way to make yourself completely immune to financial uncertainty. But if you have an emergency fund, it’s easier to bounce back financially when something unexpected happens. So if you don’t have an emergency fund yet, or if you’ve been neglecting it for a while, see if you can find any extra money in the budget to boost those savings a bit.
Not sure whether you have any money in the budget to contribute to your emergency fund? If your current budgeting method isn’t working for you (or if you don’t have one yet), check out BudgetingBlocks™! This hands-on system makes it easy and fun to visualize your money and decide how to allocate it.