Today’s post is a guest post from Emily at a Million Ways to Save. You can read more about Emily at the end of this post.

Imagine this scenario:

You’re driving into work for your very last day. The car screeches and smokes, coming to a halt in front of your local mechanic. You know that each second of smoke is an extra hundred dollars and your local car repair place loves to take each penny.

When you take the car in, the initial estimate is around $700. What do you do?

For those who don’t have an emergency fund, there are the usual options when short-term cash is needed. You could take out a personal loan for the car repair from a local title loan place. There’s always borrowing from friends, but they’re usually tapped out. Maybe a relative can help you out? None of the three options are pleasant.

For those who have an emergency fund, the solution is simple. Take the $700 from the emergency fund and put it into the car repairs, then breathe easy while making a note to replenish it at the next available opportunity.

Without an emergency fund, the roller coaster ride of daily life can be crippling. Cars will need repairs, people within the family will get sick, and houses will deteriorate. What’s worse is that you never know when these events will occur. All of these events (and more) are roadblocks to your financial fitness. Having an emergency fund in place takes your emergencies from being giant boulders into widely spaced barricades.



Remember Mayhem from the State Farm commercials? His last name is Murphy. He loves to visit everyone, and while we would love to block his path, he always seems to find a way to stop by. To keep Murphy’s visit from being completely devastating, stash some cash for his inevitable arrival so you can happily (and quickly) show him the door.

An emergency fund is a pool of money (between $500 and $1000 dollars) specifically set aside for the unexpected events in daily life. This isn’t to be confused with your mad money fund or vacation fund, nor it is to be used as your personal ATM card. The money that you put into your emergency fund is to remain untouched until you absolutely need it. Before overpaying your bills, get the emergency fund in place. That’s how important it is! While it seems counterintuitive to your debtbusting cause, it will help you become financially free.

Why Emergency Funds Rock My Face Off

1. Emergency Funds Save Money-Before I seriously considered debt elimination, I lived paycheck to paycheck. I made a reasonable salary and had almost no bills, so I would take the money that I earned and put it toward eating at local pho places. Everyone knew me at the restaurants because I would show up there at least three times a week. Then the transmission of my Pontiac T1000 gave up the ghost. Fixing the car was out of the question, and I was forced to purchase a new car at an obscene 19.5% interest.

If I’d had an emergency fund at the time, I would have known that I could use that against the cost for car repairs. I wouldn’t have been stuck with the limited options of buy another car or walk to work. It took me four years to pay off the car when it would have taken only a few months to pay off the emergency fund. Now, I think of my emergency fund as a bank loan with very friendly repayment terms.

2. Psychological Satisfaction-I would love to believe that I am perpetually on the tightrope between financial responsibility and craziness. Even though I would put my money toward the bills, there was always that moment at 12:02 (the money would be direct deposited at 12:01) when I would have wild visions of taking trips across the country. I seriously wanted to believe that I could pack up my stuff at any time and go.

In reality, what I want is the idea that options are still on the table. The emergency fund provides psychological and emotional satisfaction because I can dream about the things that I would do with $1000. I have no true intentions of spending it on anything other than my fiscal obligations and the occasional Taco Bell taco, but the mere notion that I could do anything with the cash keeps me psychologically sound.

There’s also peace of mind that comes with knowing that I’ll be prepared for anything that happens. I’ll be able to get my car fixed, go to an urgent care center, or get a new water heater for the house. It’s a HUGE relief to have this in place.

3. Emergencies are Easier-My mother called at the beginning of last year. She was experiencing pain in her abdomen. Living only half an hour away, I rushed over to her place and convinced her that she should go to an emergency room. She was rushed into a treatment room where it was discovered that she had shingles. There were shots and prescriptions given, as well as appointments made for follow up visits.

My mother is like a spastic squirrel when it comes to finances. She’s of the firm belief that if she still has her ATM card, she has money. As usual, she didn’t have any money, and the bill was around $500. We paid the bill out of the emergency fund. When the emergency was over, we kept paying the normal bills. Our fund was replenished within 3 months.



Where Do You Start With Emergency Funds?

Emergency funds need two things: money and a place to put it.

Let’s start with the easy one. a bank account. Search for a low interest bearing account that in a bank that is separate from your normal one. The money needs to be liquid, yet inconvenient. Credit unions are a great place to put your money, because they offer many other benefits to members and usually don’t charge monthly fees. This is not an investment account so a money market or a low interest savings account will be perfect. Do a little research within your local area to find something that works for you.

Funding the account is the next step. To fund the account, examine your expenses and see what can be shunted into your emergency fund. Is there anything left after all of the bills are paid? Can you trim anything from your food or your power bills? There are a million ways to save on your bills. Take any extra money that you would use to overpay your bills, regardless of how much, and open a savings account. Remember that every penny counts.

You might examine your expenses and find that there’s no money left after the bills. You might also be a college student who’s living on ramen noodles and your parents. It might not be much, but money is always available. Have you truly considered all of the money making options? How about a part time job? Selling your stuff? The possibilities are truly endless for the determined. I’ve been there too, and I can help.

Our Story

When we started, we were wracked with debt. There were car loans, student loans, credit card bills, and everything in between. I was making enough money to cover all of these expenses, but I didn’t have an emergency fund. My boyfriend decided that we should start one, and it took us a few months to get it fully funded.

After getting the EFund in place, we were a magnet for Murphy. He loved us, wanting to put us to the test at every available opportunity. There were car failures, hospital trips, emergency room visits, and more. It seemed that every time we’d replenish, another thing would hit us. Gradually, the assault stopped, and we were able to replenish and start paying off the bills. Now, we’ve got only the credit card, the mortgage, and the recurring bills.

How Much Cash Should You Put In?

Financial gurus suggest that you put either $500 (for the folks who are just getting started with their careers) or $1000 (for everyone else) into your emergency fund. I agree, since most of the emergencies that I’ve encountered have cost between $500 and $1000. Expensive emergencies (like hospital visits) can usually be tempered with the addition of a $1000 down payment, and you can redo your finances after that. This isn’t to say that you can’t put in more, but $1000 has worked out very well.

Can You Use the EFund for Non Emergencies?

Emergency funds need to be used only for emergencies. Christmas isn’t an emergency because it’s predictable. Your upcoming anniversary isn’t an emergency because again, you knew that it was coming. It’s not to be used to eat dinner at your favorite restaurant, either.

When Should You Start the Rocking EFund Experience?

If you don’t have an emergency fund established, start now. Even if you can only put a few bucks toward your goal every week, it still counts as something. Once I started saving, it became a game to me to see how much I could trim off of my regular bills. The first week was slow with only $25, but the fund grew over the course of a couple months into $1000. Fortunately, we didn’t have any serious financial setbacks during that time. Fund the emergency fund at a pace which is slightly uncomfortable to you. This will help to get it funded faster.

What Happens After You’ve Tapped the Fund?

Stop your debt repayment plan and immediately push that extra money toward your emergency fund. Treat it like you were first starting. Life’s not going to wait until you’ve got the money in place, and you shouldn’t wait to start saving again. Money reserves will save your ass.

Start slowly. Build quickly, but please start.

Emily is a freelance writer who spends much of her time scribbling, wrestling small kittens, and rabble rousing. She is the sole writer at Million Ways to Save, a blog dedicated to listing all of the ways to save cash. If you like how Emily writes, and you need to take a break, send an email to justyammer@gmail.com