I honestly believe that everyone needs at least some form of an Emergency Fund. If you are a follower of Dave Ramsey and you have debt to payoff, you might be on the bandwagon that advocates for a mini emergency fund of $1,000 until your debt is paid off, and that’s fine as long as it works for you. But the important thing is that you have at least some emergency funds for life’s unexpected events, and that you eventually contribute more to it down the road. After all, $1,000 won’t get you too far if you have a true emergency.
I’ve met a few people in the personal finance world that don’t think some people really need a 3-6 month emergency fund for various reasons or they believe that investing their emergency fund in short-term investments in the way to go so they are earning money on their money. Personally, I don’t think this is a wise idea for most because emergency funds should be as liquid as possible in case you need to access them with very short notice in an emergency.
If you have doubts about whether or not you need an emergency fund, see if you fit any of the categories below. These 5 people definitely need an emergency fund.
The Car Owner
Don’t even get me started about what percentage of the times I’ve had to access my emergency fund were for my car. Car troubles are one of the main reasons people need an emergency fund. Cars are essential for many people to get their jobs so they can continue to earn money, but they are still a nuisance to own sometimes. They are constantly needing upkeep, maintenance, and occasionally repairs.
You need to budget for car upkeep, maintenance, and some repairs in your regular budget if possible. Believe it or not, tires do go bald and brakes wear out over time! But on top of that you should always have an emergency fund to go along with the obvious. Your alternator is going to quit on you when you least expect it, or you may wake up to a tree that fell on your car and now you have to meet your auto insurance deductible. No one thinks it could ever happen to them until they wake up with a tree on their car 🙁
The Home Owner
Similarly to owning a car, if you own a home you need to have a line item in your regular budget for things like upkeep and maintenance for your home. These things could consist of new air filters for your home, grass seed for the back yard, a drywall repair kit or even a new garden hose.
Contrary to popular belief, buying a new couch or digging a new pool is NOT AN EMERGENCY. They may feel like an emergency when you return from the Jones’s Backyard Oasis, but these are nothing more than an “I want it right now!” Think of emergencies as the broken hot water heater (average $600 to replace), the broken water line (your insurance deductible), or the garage door motor that quit (average $400). These are the things that we cannot exactly plan for, however we are proative and plan anyway via our emergency fund.
Another thing to keep in my mind is many emergencies can be covered under $1,000 if you are aDIY kind of person. However, if you weren’t born with the handyman gene, or your A/C unit needs replacement, $1,000 simply won’t cut it.
Note: Chris Peach recommends a $1,000 – $2,000 starter emergency fund for this reason. If you are renting, you could lean on a the lower end, however if you are a current homeowner, lean closer to the $2,000 end.
The Single Person
Single people are in a unique financial situation that can make an emergency fund even more important than for dual income couples. This is especially true for the single person who relies on only one source for their income. This fund can be used to tide them over if they suddenly lose their job and sole source of income, or if they become sick or injured and are unable to work. In these instances, a $1,000 mini emergency fund will likely be used up quickly. So it’s important to build up a starter emergency fund of $1,000 – $2,000 to get your through your Debt Payoff, and then fill up your 3 – 6- month emergency fund as quickly as possible.
Why the 3 – 6 Months?
You may be wondering why 3 – 6 months? Great question! 3 – 6 months is a range because not everyone is the same. I base the 3 – 6 month rule on a few key life circumstances:
• Your Job
• Rent vs Own
• Uniqueness – Medical, Special Needs, etc.
If you are a school teacher with a steady paycheck every two weeks and you are renting a one bedroom apartment, you are probably going to only need a 3 month emergency fund. On the other hand, if you are a homeowner, and you’re income comes from commission only sales, then you may want to lean towards a 6 month emergency fund. Chris Peach uses a 4 month emergency fund because he is debt free (not including mortgage), he is a firefighter in a large city (steady income), and his wife is in Corporate America (less steady).
Once you hit retirement, you no longer need an emergency fund since you have your retirement savings, right? Wrong! You should never count your emergency fund as part of your retirement savings and you should still maintain the fund no matter your age. Health problems are more likely to arise in later years and an emergency fund can be a good way to help cover those costs if you have no other option. It’s not surprising that your later years will be medically the most expensive. With that said, the number one cause of bankruptcy is from medical expenses. Have an emergency fund of 3 – 6 months, or at least the size of your max out-of-pocket expense you have with your health insurance company. Retirement is supposed to be stress-free, right? Keep it that way with an adequate sized emergency fund.
Being self-employed is a whole other topic, because self-employed people often have an irregular income that they have to budget with. But this doesn’t exempt them from needing an emergency fund. If anything, it actually makes an emergency fund all the more important.
I suggest having an emergency fund for traditional emergencies; home repair, the unexpected car that falls on your car, and medical emegencies. In addition, the self employed need part of their emergency fund to act as an income buffer to help make up for low income months in the future. Even if you live on last month’s income, having a buffer of money to add when you have a low earning month will be very reassuring.
While everyone should have an emergency, these 5 particular groups of people should make building and maintaining that fund even more of a priority on their financial checklist. If you’re like me, you might even qualify under more than one category. I am a car owner, a home owner, a single person, and I’m self-employed, so I know that having an emergency fund is very important to my financial security.
Do you have an emergency fund?