Episode 006: Everything You Need to Know About Your Emergency Fund

What’s this Episode About?

Everyone knows there’s a prominent author that gives a one-size fits all answer when it comes to the emergency fund.  We dare to differ with him!

We start off with sharing how excited we are to offer our new Take Back Your Finances Podcast list. As part of this list we will send you notifications when we post an episode and occasional, additional resources from the latest podcast episode.  Plus just for signing up you will get a free gift – How to Build Your $1,000 Emergency Fund in 30 Days (a $5 value)!

Note: When Cassie shares that we share the $1,000 amount for an Emergency Fund in our “book”, what she meant was the ebook mentioned above.  In our book, The 2% Rule to Get Debt Free Fast: An Innovative Method To Pay Your Loans Off For Good, we encourage using the Percentage Based Finances (PBF) method we discuss below. 

We promise that although this seems like a really boring topic, it’s critical to talk about it.  No one wants to use their emergency fund, but it’s important to have when you need it.  We like to refer to it as financial insurance.

There’s a popular author that shares that all families (no matter their size, circumstance, or any other factor) should have the same emergency fund of $1,000.  But we believe that’s not reasonable.

We honestly all have different financial situations, levels of emergencies and amounts of income.  Telling a family that makes over $100K each year they need $1,000 is one thing.  Telling a family that makes $35K each year is something totally different.  We don’t want you to feel defeated out the gate.  Thus, we have a different plan.  Keep reading (or listening!).

What is an Emergency Fund?

First, an emergency fund is not an “emergency funnnnnd”.  It’s not the “fun” fund, it’s not for trips, or for special sales on that gaming console.  It’s literally an emergency fund.

It should be put in a separate account and left alone.  It’s only to be accessed when you have a financial emergency fund.  Essentially you need to forget about it until you have an actual emergency.

Where Should Your Store Your Emergency Fund?

An emergency fund is something you shouldn’t have easy access to.  We share a few ideas how you can make that happen:

• Set it up in a separate bank account – This may not be optimal however as it may be too easy for some families to have easy access to that money.
• Set it up in a bank account at a different bank – This can be a huge plus because you have to take actual, physical steps to withdraw that money.
• Put the $1,000 in a secure location in your home – You might have a place where you store other sensitive and secret data like your social security cards or birth certificates.
• Open up and store it in a Roth IRA – This tip only works if you are not optimizing your Roth IRA and maxing the annual contribution for your retirement.  If so, this can be a great way to have a long-term savings – including the emergency fund.  This will give you access to a higher yield savings as you can invest in any number of options.  Remember as we’ve mentioned in our book you can withdraw the contribution amount and keep any earned interest earned in the account.
• A high yield savings account – Cassie mentions high-yield savings accounts offered by Ally bank or American Express (not tied to a credit card – just another financial option they offer).  A high-yield savings account will give you a much better interest rate than you can find through your local bank.

Remember, your emergency fund should only be used when necessary.  Additionally, you should only withdraw the amount you need for the emergency as well.  Then quickly replenish that amount.  That way you will always have that amount working for you, even when you have to quickly withdraw an amount for an emergency.

One note to remember is to understand how long it will take to get the money out.  It may take longer to get money out of that Roth IRA than a savings account.  Ask yourself however how often you need money immediately for an emergency.  Often, many emergencies will have a buffer of a few days, so that time to access the money might not be a big deal in your situation.

What Qualifies as an Emergency?

An emergency fund needs to be reserved for a true emergency.  Some ideas we share as examples:

• A trip for a funeral
• Your car breaks down
• Your washer or dryer stop working
• A heating source breaks down
• A broken water heater

Is a medical expense categorized as an emergency?  We walk through a number of examples and discussion points surrounding this issue.  In the end, a majority of the time it’s likely not eligible as an emergency fund expense as you can usually setup a payment plan for the expense.  Do whatever you can to make payments on it and do not put it on a credit card.  If you are an absolutely desperate point where the medical debt collector will not work with you then it might justify an emergency.

Whether it’s medical debt or any other expense, do everything you can before considering your emergency fund.

How Much Does a Family Need for an Emergency Fund?

If you ask the majority of people, the answer is always the same: $1,000.  This is the answer that has been answered since a popular talk show host recommended it years ago.

If you ask us, the answer is, “It depends.”  There just isn’t a blanket amount that will work for every family.

We share again the idea of Percentage Based Finances (PBF).  The emergency fund is part of this and should be 1-2% of your gross income.  This is an achievable amount.  Plus we have found that cost of emergencies often correlate with the income amount.  Remember, this is not a permanent savings account.  Nor is it your 3-6 months of expenses emergency account we encourage you build after your debt.  This is simply your financial insurance we mentioned before.

From our experience and working with other families, we have discovered that generally 1-2% works for most people.  For an example, a $35,000 income would equate to either $350 for a 1% emergency fund or $700 for a 2% emergency fund.

We share a checklist to help you determine the size of your emergency fund.  Keep track of how many questions you answer “yes” to:

• Do you have any major appliances greater than 10 years old?
• Do you own a car with more than 100,000 miles?
• Are there more than four people in your household?
• Do you have a home insurance deductible greater than or equal to $1,000?  This could a great time to find out your deductible amount if you don’t know it.
• Is your home over 20 years old?
• Have you had more than one emergency expense in the past year?
• Do you have aging pets?

If you answered “yes” to two or more questions, it is probably a good idea to plan to set aside 2% of your gross income into your emergency fund.  Otherwise, 1% just might be the perfect fit.

We just love the logic behind this and share more reasons why this approach to the emergency fund works out so well!

How Long Should Families Take to Build Their Emergency Fund?

We ultimately believe that when a family is paying down their debts they should use a slow and gradual approach.  This builds a sustainable budget and lifestyle.  But when it comes to the emergency fund, it’s critical to build it up quickly so you can start paying down your debt sooner.  Do whatever it takes to get it set up rapidly – in 30 days if possible.

What Can You Do to Build an Emergency Fund Quick?

We mention that there are so many tips and ideas to get you started. 

We start with one tip: The Penniless Week.  First we share what’s it’s not: spending more before and after to make it through the week.  No!  What it means is you literally spend nothing out of pocket for the week (one exception is gas to get to work).  Many families that have done this have saved an extra $200-$500.  We share a link to the resources below on many of the tips we shared in this episode, the rules for the challenge, and how to go about it.

Don’t forget we have already written an ebook that shares a number of tips on how to build your emegency fund fast – in just 30 days!  If you want that then sign up for our Take Back Your Finances Podcast list.  You will receive that as a free gift and then never miss an episode.

Our 2% Tip of the Week:

The 2% Tip is where we share an idea to either shrink your budget or increase your income by 2%.  This week we discuss an unconventional increase as you work your side hustle by using deductions.  More specifically, this tip covers the importance of tracking your expenses to use them as deductions on your taxes.

It’s important to track your mileage and all out-of-pocked expenses (keeping those receipts) so you can deduct it at tax time.  If you don’t have your receipt you can’t deduct it.

Cassie recommends an app called Mile IQ to help you track your mileage.

When it comes to the receipts there are apps you can use to take pictures of your receipts.  Check those out!

For us, we use a three-hole punch to put gallon sized Ziploc bags into a binder and store all of our receipts.  Sure it takes a bit more time at the end of the year but it’s worth it to us not having to spend the extra time throughout the year organizing each day.

In the end, whether you use an app or a more primitive storage method like us, it comes down to personality type.  It honestly doesn’t matter how you store the receipts as long as you actually do it!

Another tip is to find a family member that just loves organizing everything for you.  Let them go to it!

Whatever it takes and whatever system you choose, make sure you actually keep what you need so you can deduct those expenses.  Doing anything else might mean you lose a lot of money.

Resources mentioned in this podcast:

• Check out our book, The 2% Rule to Get Debt Free Fast: An Innovative Method To Pay Your Loans Off For Good.  We discuss more details instructions on how to use the Roth IRA for a long-term savings account (that is, when you’re not quite ready to use it for retirement).  Additionally we share much more on the emergency fund as well!
• We created a 64-page workbook to give you the tools and the resources to help you pay off your debt.  You can see the digital version or the printed version.  Our questionnaire is included on determining the size of your emergency fund with some other tools to help you along the way.
• When discussing whether medical debt was an emergency, we referenced our prior podcast episode in which we discussed medical debt as part of our 2% Tip.
• We share all the nitty-gritty details behind The Penniless Week.  Read above and listen to this episode to find out what it’s not and how it can benefit your family.
• If you’re looking for more ways to bring in extra income (many that can help you grow your emergency fund) then check out our post of over 100 ways to earn extra income.  Honestly this list has grown to over 150 ideas today.
• As promised here’s the article where we dig even more into how much money you need for your emergency fund.
• Use MileIQ to help you track your mileage.  When tax time comes it will all be organized and ready for you.

Don’t Miss an Episode:

If you want to make sure that you never miss an episode we encourage you to sign up for our Take Back Your Finances Podcast list.  We will also send you additional resources from the latest podcast episode like checklists or related worksheets.  These will help you implement that weeks topic – only for members of this list!  Plus, just for signing up we’ll send you our copy of How to Build Your $1,000 Emergency Fund in 30 Days (a $5 value) just for signing up!

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