If you asked me a year ago whether I thought you needed an emergency fund (E-fund) my response would be that a basic emergency fund of $5,000 is plenty. I believed this would cover most scenarios where you’d need access to a decent sum of money all at once and beyond that you should be investing the rest in your 401k, IRAs, or whatever option your employer offers.
Rumblings of the pandemic began late 2019, however it wasn’t really taken seriously until about mid-March 2020. At that point many businesses had no choice but to close their doors leaving many people without a job or any kind of backup plan. After a period of time the pandemic even forced some businesses to close permanently.
I have never experienced an event quite as devastating as the COVID-19 pandemic. I have only really experienced one other large financial event and that was the recession of 2007-2009. The recession made it hard to find a better job as I was graduating college but I didn’t lose the job I already had. The only other major event that compares in my opinion was the stock market crash in 1929 that led to the Great Depression.
A Change in Belief
I used to think an emergency fund equal to one month of your expenses was plenty. If you had a month to reestablish your income in most cases this would work out. I also figured that within a month you could decide whether doing something like taking out a line of credit from your mortgage was appropriate (also known as a HELOC).
This probably sounds ludacris but I figured my money was better off in an investment account of some sort growing ~7-8% instead of not even 1% in most checking/savings accounts. If that money is invested in your retirement account it can be quite tricky to get at but if it’s in a regular investment account you could access your money within a couple of days by selling off some of your holdings.
Now, I believe that a much larger emergency fund is necessary given the devastating effects of the pandemic. I’d rather have a minimum of six months of expenses or ideally an entire year of expenses in liquid cash form. To help with the growth issue I’ve started utilizing bank bonuses to grow my emergency fund at a more aggressive rate than the typical rate of less than 1%.
I have not reached my six month emergency fund goal yet, but as I add more to my savings I feel more and more secure.
How You Can Get Started
To get started saving an E-Fund I always recommend people start off with the basic $1,000 until they have paid off all high interest debt. In most cases $1,000 is a reasonable amount to save up within a month and put aside and it covers many surprise expenses. If you’re struggling to come up with $1,000 check out my income reports pages for ideas.
Once you’ve paid off your debts the next goal is to come up with 3 months worth of expenses for your emergency fund. To do this you’ll need to start budgeting each month. Creating a budget is never fun but it will help you spot inefficiencies in your expenses and help you decide how much you need in your emergency fund.
Finally, you need to keep saving until you’ve made it to 6 months worth of expenses. Congratulations, you now have a fully funded emergency fund and you’re ready for most of the challenges life will throw at you.
A Change in Feelings
As you build up an emergency fund you’ll notice how you feel continues to change. As I add money to my own emergency fund I’m noticing that I feel more and more at ease about life. I’m finding that I’m no longer worrying constantly and I can sleep at night. I know “saving money” *insert annoying duh voice* is no fun but I promise you that the security and peace of mind it provides is all worthwhile.