I first learned of emergency funds in 2015 when I started educating myself on personal finance. Having an emergency fund was the reason I stopped living paycheck to paycheck, worrying about money. So, what is an emergency fund anyway? It is “a stash of money set aside to cover the financial surprises life throws your way” (definition from Vanguard.com). Life is full of inevitable surprises, and they can be costly and quite stressful if you don’t have plans already in place to address them.
When I started educating myself on personal finance, I listened to podcasts and read many blogs and books. They all recommended emergency funds, but in different ways. It was often referred to as “FU money.” Some experts recommend that you put only $1,000 toward your emergency fund until you have paid off your debt because it is just enough to put out any fires that may occur during your debt-free journey. After the debt is paid off, it is suggested to have a savings worth 3 to 6 months of living expenses. Others suggest having 3 to 6 months of a cushion, even if you are in debt.
After much research, I came up with my own version. While paying off debt, I had between $1,000 to $3,000 in my emergency fund. After I paid off my debt, I decided to have a much larger savings than 3 to 6 months. I increased my emergency fund to be worth 6 to 9 months of expenses. Personally, I like having liquid cash on hand; but instead of leaving all that money in a traditional bank account, I put half of it in CDs, money market accounts, and high savings online accounts where interest rates are now above 2% instead of 0.001%.
Thankfully, I did not have a need for my emergency fund while I was paying off debt. Eventually, I had a need for it and boy, was I glad I had it!
In my quest for warmer weather and a tax-friendly state, I moved to Dallas, Texas last summer. It turns out that my husband got a job there, and we had to move sooner than anticipated. At the time, I did not land a job just yet, nor did I have a Texas license, but I knew that if it came down to it, I would be comfortable without a job for months because I had my emergency fund to lean on. With that security, we up and left Indiana before I even had a job in Texas.
As you can see, life happens. Jobs can be temporary and major unexpected expenses can arise. With that awareness, I strongly encourage you to have an emergency fund. It is a great way to avoid living paycheck to paycheck and struggling financially. Most importantly, your peace of mind will not be compromised at the sight of new life changes.
If you have been living paycheck to paycheck, give this a try. What do you have to lose?
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