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Yes, You Do Need an Emergency Fund (talking to you, indebted millennials)

   Posted On: November 20, 2013  |    Posted In: Personal Finance 101  |     Posted by: Broke Millennial®

The first time my parent’s threw me a surprise party, I almost called their bluff because of a pack of Bubble Tape.

It was 1998 and the eve of my ninth birthday. In an effort to get me out of the house so the guests could arrive, my Dad insisted I accompany him on a trip to MediaPlay (remember when you went to a store to buy CDs?!). In the checkout line, I stood entranced by all the candy. I picked up a roll of grape Bubble Tape and asked my Dad if I could have it.

“Sure,” he said.

I knew something wasn’t amiss.

You see, in my family my sister and I didn’t just get to pick up candy or toys and have them paid for in full — we had to stake 50%.

As I started to chew on a piece of my “free” Bubble Tape the wheels in my eight-year-old mind started churning. What could possibly be the root cause of this benevolent act?  Was my dog dying? Did I perform some task worth a reward that I hadn’t been told about? Was I getting another sibling?

My Dad and I strolled back into my house and I saw my Mom perched on our stairs holding a video camera. She hit record and said, “Hey Erin, why don’t you do a dance?”

As a natural-born performer, I obliged and didn’t find this nearly as baffling as the Bubble-Tape-Gate. Well, not until 30-or-so eight and nine year olds jumped out from various locations and screamed “surprise.”

My Theater major came as a surprise to…well, no one.

Fast-forward to 2008 and the years of paying for 50% of what I wanted started getting applied to my habit of saving.

As an RA (my first well-paying job) I had the choice of putting my salary towards my tuition or in the bank. Fortunately, scholarships covered 50% of my college tuition — shockingly the amount my parents required I be responsible for — so my paychecks went in the bank.

I made $6,000 a year which was split into three paychecks of $1000 each per semester. My financial obligations outside of tuition were minimal: cell phone bill and all car-related expenses.  So I made the decision to focus on building a nest egg because I could afford to put 50% of each paycheck into savings. I planned the nest egg would fund my dream of moving to New York City after college graduation.

While I called my savings a “nest egg” it ultimately turned into my emergency fund and helped keep my finances afloat my first few months in the Big Apple.

A lot of advice surrounds emergency funds. Financial advisors tend to suggest three to six months of living expenses. They cite this number in case you lose your job and need a cushion while finding another income.

My generic advice to my unmarried, childless peers is $3,000 to 5,000 (depending on your income and debt situation). I say if you have debt and no dependents (including pets), shoot for a minimum of $1,000. Have kids or pets + debt, then save $1,500 in cash.

efundHow did I come up with this number? There is not fancy formula except that it should be able to cover expenses for a couple of months if you suddenly lose your job or if an unexpected cost arises: sick family members, car accidents, broken bones, surgery, your dog eating a pound of chocolate etc, etc, etc .

Once you’re married, or a homeowner or have children and are closer to debt free than not, then think about calculating everything that could go wrong and have enough money to handle all of them happening at the same time. In other words, the deductibles for your insurance policies saved + a buffer for incidentals.

But what if you have debt?


Sorry — did that come off a little aggressive? I don’t care.

I understand the compulsion to pay off debt as quickly as possible. You think you’ll be in a better place if you can crawl out of the red and so you focus every last penny on your efforts. But what happens if an emergency arises and you don’t have a buffer of accessible cash to cover the cost? You might take out a loan, put the cost on credit cards or horror of horrors – raid your 401(k). Essentially, you’re digging yourself deeper into debt because you elected not to have a few grand saved up.

An emergency fund also keeps you from dipping into that 401(k) (or IRA) account you so diligently set up when you started working. Your retirement fund should be viewed as a last resort option. Not just because it hurts your savings for the future — and you have to repay that loan — but it can come with heavy fines.

There is often a limit you can take from your 401(k) as a loan — typically no more than 50%. You can repay the loan with the same deductions from your paycheck you’ve been using to contribute. Some companies even require you to payoff the loan before you start contributing again. And if you leave your job (or get fired), you’re required to immediately repay the loan.  If you’re younger than 59 (and-a-half for some reason) you’ll likely also get slapped with 10% penalty tax.

There are also hardship and 72(t) withdrawals. The first you have to qualify for and you may still have to pay the 10% early withdrawal penalty. The latter allows you to take out a fixed amount based on your life expectancy, but doesn’t include the 10% tax. However, the fixed amount could be a meager sum depending on what age you start the withdrawals and will likely annihilate your retirement savings.

In short — a 401(k) should never be viewed as an emergency fund. It is absolutely the last resort if your other options (and funds) have been depleted.

Building an emergency fund can be a painfully slow process. I wish I could still afford to contribute 50% of my paycheck to savings — but these days I can only defer about 15% into savings (not including my 401(k) and pre-tax transit contributions). Don’t get discouraged if you can only afford putting aside as little as $20 out of each paycheck into your emergency fund. Eventually, you’ll start making more money and will be able to contribute more to savings. In the meantime, at least you’re creating a little buffer for yourself. Or you could just start a side gig and put all your extra cash into building up your emergency fund.


[Piggy Bank image taken from Flickr]

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42 responses to “Yes, You Do Need an Emergency Fund (talking to you, indebted millennials)

  1. I actually think if you have debt it’s even more reason to build an emergency fund. Those student loan bills don’t stop if you become unemployed (okay, that’s not completely true. Sometimes if you lose your job you can negotiate with them and they can be put on hold for a few months while you job search). I would like to be able to pay all my expenses PLUS deal with emergencies for at minimum a few months. To reach that goal it means I need to keep throwing money at my emergency fund. I would definitely advise millennials to do the same. You never know what can go wrong.

    1. Thanks, DC and Tonya! Clearly, I agree. It really helps take some of the edge off of the worry and sets you up for a better financial future.

  2. Great advice! Even if you are young and have no children you still need an emergency fund. When I was about 19 or 20 something went wrong with my car and resulted in a bill over $700, which was more money than I made in a month. I freaked out and cashed in some stock that my mother had put aside for me in order to pay for it (it wasn’t much, the amount of the bill was about how much stock I had). That was probably 15 years ago now and I still wonder how much that stock would be worth if I still had it today. An emergency fund certainly would have come in handy at that time!

    1. Sorry to hear about your emergency, but luckily had you had a way to get money without digging yourself into debt! Perhaps that’s the way to view the story instead of wondering how much the stock would’ve been worth? I tend to be a silver lining kinda gal.

  3. I’ve got about $5,000 in my E-fund right now and I struggle with the idea of contributing more. Because of my untraditional and inconsistent career path I feel like it might be a good idea to have more of a buffer, but I also know my money can work so much better for me in an IRA.

    1. I’m with you on putting it in an IRA after that $5,000 you have in your e-fund. Even though your career is inconsistent, you are resourceful and hustle for side income. I’d focus on the long-play too.

  4. Very complete and detailed article! Will repost on my FB page “Building your Credit Score.”

    An emergency fund can also help improve your credit score. An EF keeps those large, surprise expenses off of credit cards – if credit is used to pay these expenses, if could hurt your credit utilization ratio or your ability to make minimum payments if you’re in a financial bind.

    Sweet article!!

    1. Thanks, Chris! Very true about using credit cards to pay off unexpected expenses. It can create a nasty cycle of debt.

  5. Love this! I always tell people the first step to financial health is the emergency fund. $1,000+ “surprises” are very frequent in life and you never know when they will happen. The only way to reduce the stress of hitting those surprises is the emergency fund. It’s actually the best stress reducer you can have.

  6. I have never understood why some tell others not to save when paying off debt. You need to work your financial life on two fronts. Paying down debt and saving. They are both different mentalities and they require work. While I am very math oriented, I understand the emotional aspect of debt and saving.

    1. You’re absolutely right about the two-pronged approach. I don’t really understand the refusing to save mentality either, but it does indeed exist. Hopefully it doesn’t land people deeper in debt.

  7. You had me at emergency fund. 🙂 They truly our lifesavers. I’ve experienced the benefit of them myself and in my clients. I absolutely understand how it seems completely wrong to set money aside in account that is pretty much just sitting there when you have to debt to eliminate. But what I also know is that things will go wrong, things will break and it is highly likely that you will need to tap into your emergency fund during your debt repayment journey. Sometimes even multiple times. I’ve seen how a lack of emergency fund has derailed debt repayment and sometimes the discouragement of seeing more debt added has made people give-up too. You don’t have to fund it one fell swoop but keeping putting a little money aside and it too will grow.

    1. It’s all about those little steps adding up to a greater goal. Building an emergency fund is similar to the advice people give about reaching career goals, you have to identify the little steps it takes to make the bigger picture happen. $20 may seem paltry, but it sure adds up!

  8. I definitely agree with emergency funds, even when in debt. And if you can somehow have it set up for when you graduate like you did, it really helps the transition into the workforce which can sometimes drag out.

    1. It really did make my life so much easier after graduation. I know a lot of people would rather pay off some loan debt while in college, but I still advocate for setting money aside for an e-fund while in college. Just skip buying a drink or two a week!

  9. My husband works in tv post-production and twice in our pre-married relationship, he was laid off for 3 months at at time due to the nature of his career here in the city. Luckily, he had plenty of money saved to supplement his unemployment (~$350 a week in NY state). Even in his much more stable position now, we still know the importance of an emergency fund because of his past experiences.

    1. A lot of my friends here work in entertainment too and you just never know when you could be out of work. Probably one of the most important industries where people need to have a financial safety net.

  10. I have about 2k sitting in my emergency fund at the moment. I don’t want to build that up any higher until I get my student loan debt killed. Once that’s gone, I can slowly build my e-fund closer to the 6-9 month expenses level.

    1. $2k is still a respectable amount and it also depends on what your living expenses are. I need a bigger buffer because my rent is so high, but if I lived elsewhere then I’d be comfortable with a lower number.

  11. Great post! Building an emergency fund was one of the best financial moves my wife and I ever made. There was a great level of calmness that came over our lives when we had that money put aside. No more lying in bed at night wondering how to fix things when they break. The E. Fund is a must have whether in debt or not.

    1. It brings a lot of calm to my life too! And makes me feel empowered because I know I can handle most financial debacles.

  12. What good timing, I talked about emergency funds today too 🙂 (specifically my first “emergency”-a broken car and how glad I was to have my emergency fund when I needed it). Now that I’m a homeowner I’ve bumped up my emergency fund. But when I was younger $5k seemed like more than enough.

    1. Great minds, KK. I do agree with homeowners having a bigger buffer which is one of the reasons I like Johnny Moneyseed’s “formula” for an e-fund. As a renter with no car and no kids I get a bit more wiggle room.

  13. There were many a time where an emergency fund saved my behind. It allowed me to keep continuing to make my extra student loan payments. Great article which brought back memories of that bubble tape commercial from back in the day!

  14. Building an emergency fund is never fun, but necessary. It’s more fun to invest the money… or spend it. One thing I’ve done in the past is shuffle any signing bonuses I got into it. That way, it never becomes a struggle. The signing bonus goes directly into the emergency fund and it’s done and over with. $2000+ signing bonus seems pretty reasonable, for many positions out there.

    1. Using side hustle money would be another good way. I don’t have options for signing bonuses, but my side hustle helps pad my existing e-fund.

  15. My emergency fund is the reason that I’m (mostly) sane. Things go wrong and costs can add up when you have kids and health insurance deductibles and a roof and a furnace. Better safe than sorry!

    1. Once I’m a home owner I seriously couldn’t imagine living without one. As a renter (and with no car) the e-fund mostly just sits around, but it feels good to have it there just in case.

  16. I think it depends greatly. We went for years without an EF while paying down debt. With constant health problems, an older car, etc, we would never have raided it every month and potentially STILL put things on the card.

    Instead, we decided to get the rewards rather than stress me out by watching a stash of cash dwindle… or sit in our account while debt accumulated.

    But we were in a different situation from most. We had fixed payments coming to us from disability and unemployment until I ended up finding a job. So we knew exactly what we would get, and there was no issue of coming up short on rent or whatever.

    That’s what worked for us. Doesn’t apply to some. But my own peace of mind was making the biggest possible payments on our credit cards.

    1. I do understand why some folks feel the peace of mind goes towards paying off debt, but with job security often uncertain I still advocate for an e-fund. It does sound like you had a slightly different situation by knowing there would be money each month and you wouldn’t be short on rent.

      I’m also not married nor living with a significant, which impacts my opinion on these matters. There isn’t anyone there, with a job, as back up if something goes wrong.

  17. You can’t be too aggressive when it comes to vouching for emergency funds. Everyone should have them, regardless of their debt situation, or their overall financial position. These days, a lot of uncertainty surrounds us – I know people who got laid off after returning from their holidays – and it’s only wise to safeguard your future against such financial shocks.

  18. Totally agree Erin, especially the part about having one even if you’re paying off debt. I think the habit is just as important as the actual protection in that circumstance. It simply takes time to get used to putting money aside “just in case”, and it’s also incredibly rewarding when you need it and it’s actually available. Reinforcing those things as soon as possible is really important.

  19. I wrote about why I chose paying off my debt over saving for an emergency fund. Then Murphy’s law played a little trick on me and now I’m all for the emergency fund! Nothing like a little scare to get my priorities shifted in the right direction.

  20. No doubt we should all have an emergency fund. The size of such fund can differ based on your lifestyle but in general 2-3 months of your salary should be ok.

  21. Hmm, interesting perspective. I am wondering if your advice on how much e savings to have during debt repayment changes when you have a large income and lower living expenses? Hubby and I are halfway through paying off 120k in student loan debt. We expect to pay off the last of the debt in the next year or so. In the past few years, our income has increased dramatically (up to current high of12k in takehome a month), but our living expenses have remained steady ($1,800 mortgage + $1,200 in daycare for daughter +$3,000 a month for all other things). The rest of the money goes onto student loan payments.

    We have around $4,000 in savings and $5,000 in our rental account (we own a rental unit and keep that much in case there is a major repair needed at rental). Do you think that is enough? Though I listen to a lot of Ramsey, I think our income and expenses are too high to only have the $1,000 he recommends during debt repayment, but we do have a lot less than 3-6 months of expenses (which would be around $18k). Thanks for any thoughts you have!

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