100% Privacy. When you sign up, we'll keep you updated with a few emails per week.

What is Your Debt Personality?:

Lost Without an Emergency Fund

Part 1

When you live paycheck-to-paycheck (a.k.a. spending as much as you bring in each month) a flat tire or trip to the emergency room can suddenly put you and your family in the red.  A concerning number of people have no emergency fund set aside for these life events.  An emergency fund is a savings account reserved for the worst case scenarios of life – the family car breaking down, a lost job, or a medical emergency are all examples of when an emergency fund would quickly become handy.  


When you don’t have an emergency fund and these situations come up, often the first response (and sometimes the only option) is to put these expenses on credit or take out a personal loan.  There is no shame in doing this, but the debt can follow you for years to come and put greater stress on your family’s financial situation.  If a lack of emergency fund is why you’ve found yourself searching for debt relief, the first step to freedom is planning ahead so you don’t find yourself in this position again.


We’ve put together a short guide on how to effectively build up an emergency fund:


Building an Emergency Fund

From this point on, your top priority is building your new emergency fund.  Every extra penny, nickel, and dime is no longer spare change – it is one step closer to financial security.  Your first goal should be setting aside enough to cover a month’s bills: rent/mortgage, utilities, insurance, car payments, student loans.  After this, build up to 3 months, and then 6 months.  With this emergency fund in your back pocket, you will never need to put a failed transmission or a month without work on credit again.  We suggest doing two things to help build your emergency fund: start collecting your spare coins and assign yourself an emergency fund “bill” each pay period.  


You can use any kind of large container, even something like an old plastic milk carton, to collect spare change at the end of each day.  Over time, these coins will add up to a significant amount of money, and you can turn them in for paper cash or deposit them straight into your savings account.  While Coinstar offers convenient locations for exchanging your coins, please be aware that they take a large chunk (10.9%) for themselves unless you redeem the coins for a gift card.  Most banks and credit unions should provide a free coin exchange service for their customers, so look into what your local branch offers before paying Coinstar’s fees.


Going forward, you should treat adding to your emergency fund as a bill that needs to be paid just like rent or car insurance.  Each paycheck, take out and deposit a predetermined amount to your emergency fund.  Some employers may offer a direct deposit option that lets you automate this deposit, so you won’t even have to lift a finger to see your emergency fund grow.  Make sure that you are contributing a significant amount of money, but do not spread yourself too thin by saving too aggressively and having to take money back out of your emergency fund as a result.  You want to maintain the mindset that this fund is untouchable.  


Note that when building your emergency fund, aim to cover 6 months’ worth of expenses, not your overall income.  In situations where you are using these savings for an extended period of time, you should not be eating out, going to movies, or purchasing other luxuries – just focus on having enough to survive.


Once you have this emergency fund built up, where do you put it?  We recommend that you keep this fund in an account that is not directly connected to your everyday checking or savings accounts.  Credit unions that you are not already a member of (for their low maintenance fees) or online banks that do not allow you to quickly withdraw cash are good places to start.  By stashing your emergency fund in an out-of-the-way, but safe, place you are less likely to use it for non-emergency expenses (even when they may seem like an emergency at the time.)    


Emergency Fund Checklist:


  • Determine benchmarks for saving – what does one month of expenses look like for you?  3 months?  6 months?
  • Open a savings account through a credit union or online bank that you are NOT already a member of.
  • Allocate regular payments to this account by treating it like a bill that must be paid.
  • Start saving spare change.  Deposit these coins into your emergency fund whenever your selected container is full.

Want to read this later? Download this guide as a PDF or eBook.