It always pays to be prepared.
In my previous blog, I talked briefly about an emergency fund and how it can help you move away from relying on credit cards. I wanted to dedicate an entire blog post to emergency funds because they deserve their own spotlight.
There are two types of emergency funds according to Dave Ramsey: the baby fund, and the fully-funded fund. The baby fund is $1,000 and serves to tide you over for any emergencies that may happen while you are paying off your debt. Having that $1,000 ensures that you won't go directly for your credit card when you have an emergency. The fully-funded fund is about 3-6 months worth of your living expenses to help you out if you lose your sources of income.
The point of an emergency fund is that it is for emergencies only. Some things that count as emergencies are: your car suddenly needing a repair; a family member passed away and you have to buy a plane ticket; the water heater in your house broke down. Some things that don't count as emergencies are: Christmas gifts (this comes around every year; plan for it); vacations, a new pair of shoes; getting an oil change; going out with friends. If you spend your emergency money on things you should be budgeting for, it is no longer emergency money. Once you get more efficient at budgeting, and paying down some of your debt, the things you used to think were emergencies will no longer be so because you've planned for them.
Your emergency fund has to be accessible. It can't be in a CD, a Roth or a 401K. There should be no consequences attached if you use it. Maybe it's in a savings account attached to your checking account. That's where mine was. Or maybe it's in cash (in the case of your baby emergency fund). Wherever you decide to stash your emergency fund make sure that you can access it at a moment's notice, and that it is separate from your other monies. If you have to use your emergency fund, put the money back as soon as you are able so that you are prepared for any other emergencies that may arise.
I certainly had emergencies while I was paying off my student loans. I had to buy a new computer because my old one was stolen. I had to pay for a new Microsoft Office suite while getting my Masters because my subscription had expired. I hadn't realized subscriptions could expire so I hadn't planned for it. I got in a car accident with my roommate's car (the person hit me!), and had to pay the deductible to get the car fixed. These were all relatively minor emergencies in the grand scheme of life, but they could have really set me back if I hadn't had that $1,000 saved up. I, like most people, was living pay check to pay check, and paying for any one of those things could have meant I wasn't able to pay my rent on time, or that I wouldn't be able to buy groceries for a week.
It wasn't until I had to use my fully-funded emergency fund that I really saw the value of emergency funds, however.
In 2016, I worked at the Democratic National Committee during the 2016 elections. When we lost the elections, I was out of a job. For most people, myself included, not having a job is devastating. But, unlike most people, I was prepared for it. I had spent the last year stocking my emergency fund, and although I hadn't gotten it to where I wanted it to be, I still had a little over $10,000 saved in case of an emergency. Well, losing my job certainly counted as an emergency in my book.
Because I had saved up that money, I was able to take a step back and plan my next move without the pressing need to find a job. I had money to keep me for at least 3 months, more if I was frugal, so I could relax a little bit.
I still had one more semester of graduate school left at UMass Boston, so I decided it was time to move home to Boston. I took the rest of the month of November to relax after a grueling work schedule common to campaign life, and to plan what to do once I got back home. During my planning, I decided not to look for a full-time job so that I could devote myself to finishing my studies. Working at a gym seemed like a good plan to me because I could work out for free and still make some money. I used December to do some traveling I had previously planned and to say goodbye to Washington D.C. I moved back in with my parents in January and had a job working at a gym within the first two weeks.
Imagine how this situation could have gone had I not had an emergency fund. I would have had to reach out to friends and family for help, or would have had to get a credit card and accumulate debt in order to live. I would have certainly been panicking, and trying to apply to jobs that maybe weren't the best fit for me just so that I could have an income again. Having the emergency fund removed all of that potential angst from my life. And training myself to make better financial decisions made moving back in with my parents easier than it could have been if the decision had been forced on me rather than a choice I had made because it was fiscally responsible.
Emergency funds are like a safety net that can hold you up when you fall. They give you time to step back and consider your next move. If you have an emergency fund, maybe losing your job can be a blessing because it allows you to pursue something you never would have pursued if you still had that steady job. Emergency funds open up the possibilities of your life and give you time to breathe. They prevent you from falling back into what you are working so hard to get out of: not being in control of your money.
Try and save up that first $1,000. Once you do, give yourself a pat on the back. If you can, put aside some more just in case. Murphy's law guarantees that an emergency is going to happen in your life when you least expect it. I guarantee that you will never regret having that emergency fund when that emergency does come along. It always pays to be prepared.