Rich people like to say money can’t buy happiness. But if adulting taught me anything, it’s that money solves a lot of problems. In fact, the typical emergencies are easily solved with some money.
When my husband and I started ours it was the baby fund to prepare for my unpaid maternity leave. But what exactly is it?
An emergency fund is a perpetually full bucket of money for you to do what needs to be done without the pressure of waiting for payday, resorting to credit card debt, or wondering how many days you can eat spaghetti before you get sick.
It’s the foundation of financial security, and ultimately financial freedom but let’s not get ahead of ourselves. The first step is understanding exactly what it’s for.
What exactly are emergency funds for?
Rainy day money should not be used all willy-nilly. It’s not for just anything. It’s technically there to make sure your bills stay paid even when sh*t hits the fan, not to pay for another round of mimosas at brunch.
The big picture idea behind this money is to protect your lifestyle if you suddenly lost your job or couldn’t earn any money for a brief period of time. And while that’s super responsible, there are soooo many little things that come up during perfect earning conditions. To cut out the confusion of “what’s worth it”, I’ve created a little test.
In order for something to qualify as a rainy-day-worthy emergency expense, it should check off these boxes:
- urgent
- necessary
- unexpected
Things like last minute flights for a funeral or a fresh set of tires after you accidentally run over some spikes. These are things you can’t be expected to include in your monthly budget. Those spikes came out of nowhere!
But the money to deal with these problems comes from somewhere… the rainy day fund.
How much money do I need – just in case
The long standing golden rule of $1000 is a great starting point, but there is a method to the madness. The pros suggest 3 to 6 months of living expenses. So the less you spend, the less you need.
To figure out that, you need to take a good look at your typical expenses and have an understanding of what is considered a “living expense”. I cover the different expenses and my budget method here.
I am happy with around $8,000 on hand at any given time. That covers 3 months of my mortgage, our car payments, insurance, cell phone, internet, daycare, gas, and groceries. And we’ve had to use it in the past between jobs.
I was very very very happy we had it then, and even happier to build it back up when we were back on our feet. It’s a non-negotiable necessity for me after an experience like that.
What kind of account is an emergency fund?
This money needs to be easily accessible (liquid) and not subjected to any penalties when you need to access them. Emergency funds should be anywhere but under your mattress! I can’t stress this enough.
Cash systems are great and all, but god forbid your house is broken into, or catches on fire. Your safety net is GONE.
The most simple emergency funds are just a balance in your checking account. A traditional savings account is the next best step.
Side note: Most banks offer free checking and savings accounts, and if yours doesn’t then it’s time to kiss that rip off goodbye.
Seriously though, if your bank is charging you to have an account (or not using your account “enough”) then they should be fired. Banking is a competitive market and there are many free options.
However, we don’t want an emergency fund in a traditional savings account. Since the nature of this money is to cover large expenses at the drop of a hat, then it there’s going to be a lot of it and it’ll be there for a while. Perpetually replenished to your necessary amount. In that case, a high yield savings account is ideal.
A traditional savings account will pay you interest every month, a little reward for keeping cash reserves in their bank, at an annual rate of like 0.02%. So every $1000 you have saved will make 20¢ a year.
A high yield savings account pays interest too. But at a much higher rate. The rate fluctuates industry wide, but it’s currently 0.5% so every $1000 earns $5 a year. it’s not much, but it’s a heck of a lot more than 20 cents and that’s just paying money for being…. money.
Personally I love Ally bank because they have no fees and an intuitive “bucket” feature to set money aside for specific reasons. They also have no account minimum or fees. The current rate is 0.5% APY which is the highest available so you literally can’t beat it!
Other great options with no account minimum, no fees, and the maximum interest are Marcus and Chime.
Open a high yield savings account and start an emergency fund in 5 minutes
Setting up a new high yield savings account, or HYSA, is crazy easy. I opened one for my friend on my phone in less than 5 minutes. And yes, I actually timed it.
Since there is no minimum deposit or account balance, I was able to set it up without fumbling for any bank account info. That is the next step! But as of right now, it is created and ready to have automatic deposits set up for each paycheck.
I took screenshots for funsies because it shows how seriously easy it is.
From the Open an Account screen, I chose not an existing customer and went from there.
Next we’re going to choose the account type.
- Individual is self explanatory. It’s for one person.
- Ally’s Joint account can be for up to 4 people.
- In the name of a trust is literally just an individual account but for a single trust instead of a single person.
- A custodial account is what you would use if you were opening an account to manage for someone else, like a child or relative.
Then there’s the “other” account type. The vehicle that the money will be driving in, so to speak.
We’re opening a high yield savings account so we’re going to go with the online savings option.
A money market account is very similar, and currently they yield the same rate as a HYSA so it is a viable alternative. But since rates fluctuate, it’s worth checking to see which pays more at any point in time. Gotta stay on top of the market.
Steps 2 & 3 were entering personal information including name, birth date, SSN, and addresses and then passing an identity verification “quiz” to make sure you’re not just a scammer. Love those even though they still make me nervous I’ll fail 🥴
Then step 4, if you’re up to it, is entering the necessary bank info and making the first deposit! I skipped this step for now and I love that we’re given that option.
Step 5 is setting up the username and password that will be associated with this account and Voila!
Congratulations it’s an emergency fund! 🎉🤑🥲
How to fill up an emergency fund when you’re paying off debt
There’s a debate about saving while paying off debt and of it’s worth it. The nay sayers will tell you that all of your excess cash needs to go to eliminating debt instead of setting any aside.
But I (and many others) say that without an emergency fund, you’re setting yourself up for more debt so it’s a catch 22.
If you’re focused on paying off debt, then it will happen sooner than later. Even when you’re setting aside $$$ in a savings account. And frankly, you don’t need to put money into your emergency fund forever. Just until you’ve reached the magic number that makes you feel secure.
In my friend’s case, she’s paying off some high interest debts and putting $100 a paycheck into her emergency fund. We’re following a debt payoff plan and that plan will have her emergency fund full within 7 months.
That is entirely specific to her situation, but the lesson I want to share here is to set up recurring deposits to your emergency fund and treat it like another bill to pay.
That’s literally the trick. It’s another bill. But instead of sending out money in exchange for something you paid for in the past, we’re setting aside money for something we don’t want to worry about in the future.
An emergency.
And suddenly that unanticipated situation isn’t stressful. That’s what an emergency fund is there for, and that’s the only way I can keep my cool while we live on one low income with 2 kids
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