By Brandon Koll | Last Updated 8/15/2025
Have you ever had something come up like a car repair and you didn’t have the money to get it done? I don’t know about you, but I find that to be a horrible feeling. Maybe it doesn’t bother you like it does me. You might just swipe your credit card and not think twice about it. Let’s look at situations like this and what we can do about it.
What about debt
For those of you that are quick to swipe the credit card to purchase that thing you all the sudden need, you may be paying up to 25% more for the thing you just bought. You are also that much further in debt thanks to this little incident. With more than 50% of Americans living paycheck to paycheck, these situations are just making it more difficult to get yourself out of this rut. How about saving up an emergency fund instead?
Why do you want an emergency fund
As you can see, an emergency fund can be a huge saver during those unforeseen circumstances. It can keep you from paying interest from an emergency. An emergency fund can keep you from going further into debt. It can give you peace of mind and a lot less anxiety during those situations. All in all, an emergency fund is a great tool to have in your toolbelt.
How much should it be
When you decide to start an emergency fund, how much should it be. There are a lot of recommendations out there, but most are 3-6 months of income or expenses. I would recommend one month of expenses if you are paying off debt. After that it depends on how secure your income is and things like your family situation. For most single people with a secure job, 3 months of expenses should be plenty. If you are married with a single income and 5 kids, you might not feel safe until you have a year of expenses. Assess your situation and then start saving.
Where should I keep it
There are a lot of different places to keep your emergency fund. One of the most popular places is in a high interest savings account. I personally like the idea of one month’s expenses being kept in a high interest savings account. The rest should be in a brokerage account invested in an S&P 500 index fund. The argument for this is Murphy’s Law. The market will be down when there is an emergency, and you will have to take a huge loss. Sometimes with a crashing market you are more likely to lose your job, so I can see that risk as well. This is not for everyone and is risky, but I really like the idea of making a bigger return on that money and the risk is worth it to me.
What is an emergency that qualifies to use it
We can pretend that you went ahead and saved up your emergency fund. Now you need to know what constitutes an emergency. For me, it would be anything that I need (not want) that was not in my budget. Your car breaks down, your washer goes out, you had to see the doctor, or you must fix a roof leak, which would all be a good example of when to use it. You want to get a newer car, you see a nice couch you want, and a family member asks to borrow money would be good examples of things an emergency fund is not for. If you use it for every little thing, it won’t be around for long. Now let’s look at sinking funds.
Should I use a sinking fund for known things
I see some people recommend sinking funds for expenses that you know will be coming up soon. Maybe you know you will need a new car in the next few years, so you start saving a certain amount of money to account for it. Doing this will keep you from dipping into your emergency fund and could be very useful. Keep that emergency fund stocked for those things that you are surprised by.
Finance Hack – Get an emergency fund build up to stop paying interest on bad luck.
If you don’t have an emergency fund, start working towards getting one. The peace that it will provide you with during an emergency is worth it by itself. Then the money you will save on interest will be a giant bonus. In addition to that money saved you won’t owe someone else money. If you don’t have an emergency fund, get started today.
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