iv. Emergency Funds

Plan on the unplanned happening to you. It happens to all of us: a car repair, a broken computer, an unplanned visit to the doctor, a friend or relative in desperate need, etc. How will you pay for it? A recent study found that over 60 percent of households could not pay cash for a $400 unexpected expense (Board of Governors of the Federal Reserve System, 2018). Could you?

What Is an Emergency Fund?

An emergency fund is a cash reserve that’s specifically set aside for unplanned expenses or financial emergencies (Consumer Financial Protection Bureau, 2021). Some common examples include car repairs, home repairs, medical bills, and a loss of income. In general, emergency savings can be used for large or small unplanned bills or payments that are not part of your routine monthly expenses and spending.

Why Do I Need an Emergency Fund?

Without savings, even a minor financial shock could set you back, and if it turns into debt, it can potentially have a lasting impact. Research suggests that individuals who struggle to recover from a financial shock have less savings to help protect against a future emergency. They may rely on credit cards or loans, which can lead to debt that’s generally harder to pay off. They may also pull from other savings, such as retirement funds, to cover these costs.

How Much Money Should I Keep in My Emergency Fund?

There is no magic or “official” amount to keep in an emergency fund, but you can look at your own life to get an idea to start with. How much could you put into a bank account to have for emergencies? Some students and their parents will not have a problem paying for most emergencies, but many students are on their own. What can you save up over time? A common recommendation for graduates with full-time jobs is perhaps three to six months’ worth of expenses. This may not be practical for you. A large sampling of students in financial literacy classes recommend approximately $1,000.

One thousand dollars can cover a lot of small to medium unexpected expenses, such as last-minute textbooks, computer repair or replacement, car repair, or a prescription or doctor’s visit. The emergency fund is best kept separate from other money for living expenses to protect it as emergency money. While you could keep cash, an emergency fund is often best kept in a bank, in order to avoid theft or loss and still have easy access by debit card or ATM. Pizza is not an emergency!

How Do I Create an Emergency Fund?

Emergency funds can be created quickly if you have the money, or over time if you need to save a little from each paycheck, loan, or gift. You can use a financial planning tool similar to the one mentioned earlier in this chapter. Follow these steps:

• Set an emergency fund goal.
• Identify an amount to keep on hand.
• Determine how to fund it, monthly or all at once.
• Decide where you will keep your fund (e.g., a savings account) and set specific dates to deposit money in it.
• Start now!