If you’ve ever been in a situation where money felt tight, and you were scrambling to find a way to pay for an unexpected bill, you’re not alone. A Pew Research Center survey found that only 47% of Americans have enough emergency funds to cover three to six months of expenses. 

Although common not to have an emergency fund, this financial task should be at the top of your list to set yourself up for success. After all, no matter how much work you do with your money, if you don’t have access to cash for things you can’t predict, you could lose all of the progress you’ve made within an instant. 

Why do you need an emergency fund?

Off the top of my head, I can think of five times I’ve had to pull money from my emergency funds that you may or may not relate to:

  1. My first car accident
  2. Closing costs on my first home
  3. An unexpected home repair
  4. An unanticipated tax bill
  5. Job loss from COVID-19

A few times, I can also think that having an emergency fund would have saved me from stress or helped me escape a dangerous debt cycle much quicker. 

The most obvious example I can think of is a job I once had wherein my manager was sexually harassing me. It was my first ‘big girl job’ and each day and night felt like a constant struggle. From inappropriate text messages to awkward private meetings, I felt stuck and trapped in a career that I couldn’t leave. And like many others facing financial difficulty, I couldn’t go because, without that paycheck, I wouldn’t be able to pay my bills. 

For me, the choice to have emergency funds (yes, plural), is an easy one. It’s a meaningful way to protect my financial security, aside from saving money for retirement.

Emergency funds can provide you with freedom if you’re stuck in a job that you don’t love and save you from feeling like at any moment you could be put back at square one – in a cycle of debt and worry.

What types of emergency funds are necessary?

Although most financial experts will encourage you to have a general emergency fund covering three to six months of essential expenses, there are other types of emergency funds to consider. We’ll call this one the fund that protects you from job loss or an unprecedented global pandemic

But, what about other sticky financial situations that could arise? It’s not a bad idea to have multiple emergency funds (within reason).

A F*CK OFF FUND

One of my favorite emergency funds to keep (and one that I always recommend to my friends in relationships) is a F*ck Off Fund. In 2016, Paulette Perhach shared one of the best personal finance articles I had ever read. The idea behind this fund is a form of protection from financial abuse. Financial abuse is when one person in a relationship, working or romantically, deprives someone of their resources needed to survive independently. 

For me, I instantly connected this story to my personal experience at my previous job. The only way to escape that job for me was to go back to college. That way, I knew I would have student loans coming in after registering for classes. I would have felt so much more control and less fear had I had a f*ck off fund instead. Now, I always do. It’s not large, but it feels nice to have protection. It’s also, in a sense, a comfort in knowing that if my partner suddenly disappeared, left, or (knock on wood) unexpectedly passed away, that I would have a small amount of easily accessible cash on hand. If you are in a relationship or have a job, I strongly recommend you have this account to protect yourself from moments that you cannot predict nor that you would dare imagine.

A HOUSEHOLD EMERGENCY FUND

The second most crucial emergency fund you might need in your life is a household emergency fund. If you own any form of real estate or property – this fund is an absolute necessity. Now, of course, you’re probably wondering why you’d need a household emergency fund if you already have a general emergency fund. Can’t you just double dip? And yes. You can. But the bottom line is: does it seem worthwhile to take the risk? After all, you could experience job loss at any moment, and a major appliance breaking down in the same week. Don’t believe me? 2020 seems to be the perfect example of one thing after another. 

As a homeowner, I keep an emergency fund that is of the same amount as the most expensive appliance in my home. A new furnace could cost anywhere from $3,000 and up. So, that seems like a good benchmark savings goal. 

A VEHICLE EMERGENCY FUND

Likely the smallest emergency fund of the bunch is one that you might keep to pay for the annual maintenance or unanticipated cost of owning a vehicle. Although you don’t always need to keep a separate fund for this expense, it is optional. At the very least, it’s a good idea to work annual costs like winter tires, oil changes and small repairs into your yearly budget. 

The reason a fund might be beneficial is to protect you from a car accident or vehicle damage that you’d like to pay upfront rather than through insurance. For me, using my emergency fund to pay for my first car accident saved me from spending the deductible for the claim payment, and also allowed me to keep my insurance at the same low monthly fee I had worked so hard to achieve. 

Ultimately, you could find an argument for many types of emergency funds. The best approach is to look at your most expensive assets and decide which ones could use the most protection. At the very least, a general emergency fund should be a part of your financial life.

Saving too much money is never a good thing, either. So just be sure that you’re being smart with where you save your emergency funds and that each one of these funds has a useful purpose. For me, saving part of my emergency fund in an easily accessible high-interest savings account and part of my emergency fund in a TFSA works. But, it might not work for you.

How much should you keep in your emergency fund?

If we’ve learned anything from the COVID-19 pandemic, an emergency fund can be the number one protector from living paycheck to paycheck. But, we’ve also learned that it’s impossible to know precisely how much money you should save.

The traditional advice of saving for three to six months of expenses might not be enough for many people. If you had three months saved, you’re already three months past your protective layer, and if you had six months, your trial is coming to an end. So, how can you accurately choose how much money you should save for your emergency fund? I’m not sure there is a perfect answer. Instead, it might come down to risk tolerance. 

With investing, risk tolerance is a significant part of how you manage your stock portfolio. People with lower or more conservative investing styles may sell their stocks as soon as the market starts to dip because they fear significant loss. People more comfortable with risk may be more willing to take risks with their investments. 

So, for me, considering how much debt I’d be comfortable with if I were to run out of emergency fund money may be a good thing to look at — especially during unpredictable periods. 

The best thing you can do is understand what your bare-bones budget might look like, and challenge yourself to live on that income for a while to see how comfortable or uncomfortable you are.

If you’re in the position to save for these unexpected expenses, the time is always now. Otherwise, it might be too late.

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