Yes, You Do Need an Emergency Fund

I’m not proud to admit it, but if something unexpected were to happen to me right now (like if I needed to fill a prescription that isn’t covered by my insurance, or if my internet friend who is a Nigerian Prince required just a few thousand dollars more before he could start sharing millions of euros with me), the only emergency funds I’d have would be my high-interest credit card. But only until it maxed out, which wouldn’t take long. Or my parents, who don’t charge interest but would surely cost my dignity. And unexpected expenses pop up often! “Shit,” as the man running beside Forest Gump discovered, “happens.” What’s more, it happens all the time.

When you don’t seem to make enough to save, hearing that you need an additional savings fund for emergencies can seem hopelessly daunting. But, fun fact, neglecting to prepare for an emergency won’t stop an emergency from happening. Pets get sick. Cars break down. Jobs disappear. Awesome cousins have awesome destination weddings during awesome peak vacation season. So, even if you have debt (like me!), it’s time to at least start building your own little safety net— let’s call it your “In-Case-Shit fund” (h/t to an old Chris Rock bit).

Figure out how much you need.

This In-Case-Shit fund isn’t meant to pay off a mortgage or your future kid’s university. It’s meant for the things you just cannot plan for so that you’re not one hiccup away from a missed bill payment. It’s more an art than a science, but here are a few important factors to consider:

What would happen if your income temporarily stopped? Is there a fall-back plan available?

Companies downsize, people get sick, sometimes you need to go soul-searching and make a career change. That’s all just fine. The solution – some extra cash in your bank account. The more obligations you have, the more you need. Think of a guy with 3 kids and 2 mortgages (he’s got a rental property with tenants in it – for now) vs. a straight out of school, highly employable 21-year-old with no debts. He’s renting an apartment and worst case, can move into his parents’ basement. Your ideal fund size is a factor of your monthly expenses, so the bigger your expenses (and fewer people available to bail you out), naturally the more you need.

How likely could your income decrease or disappear?

The less predictable your income is, the more money you need to stash away. The owner of a high-end cabinet making business needs more savings than someone with a stable job at a large company. If your income is stable, aim for enough to cover 3-6 months worth of expenses vs. 6-9 months if you’re a freelancer.

Do you have high-interest rate debt?

If you live on credit and a prayer— you’re going to want to shovel as much money towards your credit card balances as possible (it’s expensive to finance your life at 20%!). But still, you need a buffer to keep you from racking up more debt. Aim to save around $1,000 if you are single, or $1,500 if you have dependents (that includes Dave. Dave is your dog. I have just named him.). If you don’t have said debt, use the rule of 3-6 months of expenses, or more if you’re self-employed.

Of course, in order to do that, you’ll have to know how much your expenses are—something Irrational Financial Avoiders (IFAs) like myself don’t like to think about. But here’s help.

You can’t spend money you forget you have.

The best way for IFAs to save money is to exploit our natural tendency toward avoidance. Figure out how much you can give up without too much difficulty, and have your bank automatically take that from your paycheck.

The goal should be to put away a $100 or so per month, but if that isn’t feasible right now, there’s no sense in setting a goal you won’t be able to keep. Obviously, some sacrifice will be necessary if you want to save, but expecting yourself to suddenly thrive under a self-imposed austerity program is as unrealistic as thinking you don’t need to save at all.

Don’t let that money just sit there—make it do a thing! Namely, grow.

How many accounts should you have? One more at least! Shop around for the best high-interest savings account (“HISA”). You’ll also want your savings account to be separate from the account you use for day-to-day transactions, have low or no transaction fees, and allow you to make withdrawals without penalty.

Then, onto the next one.

After a month or two of getting used to living with marginally less because you’re saving marginally more, it’s probably time to think about tackling some of that debt. You’ll want to avoid it, I know, but look how good you were with your emergency fund. You show your IFA tendencies who’s boss.