It’s never been more apparent than in 2020 that an emergency fund is essential to long-term financial security. The fact is you just never know what might go wrong. No one thought in 2019 that they would lose their job because of a global pandemic, but here we are. Most of us didn’t expect the housing market crash and subsequent recession last decade either. National crises are far from the only reason you should be prepared for a financial emergency. Things go wrong every day—a medical diagnosis, a failed business, an eliminated position—it’s nice to believe that nothing bad will happen to us, or if it does, everything will somehow work out, but it’s not realistic.

The best thing you can do to prepare for a financial shock is to have an emergency fund. You already know that, but if you clicked the link to open this post, you probably don’t have one or have a seriously underfunded one.

Emergency Fund Basics

What is an emergency fund? 

Let’s start by making sure we’re on the same page. An emergency fund is exactly what it sounds like, money set aside to be used in case of a financial emergency. It is not your checking account or your main savings account. Your emergency fund should be in a separate savings account designated for just this purpose. “Needing” the newest iPhone is not an emergency. Regular maintenance expenses for your house or car are not an emergency either (check out this post on sinking funds for more on saving for those expenses). 

Your annual vacation is for sure not an emergency. That and other big purchases/expenses are something you should be saving toward in a savings account. Your savings account is a place to stash away money until you reach a goal. Then you spend it!

If all goes well, you’ll never have to spend the money in your emergency fund. A financial emergency is something you didn’t see coming. It’s a truly necessary expense or collection of expenses. Losing your job is one of the more common financial emergencies.

How big should your emergency fund be? 

The conventional wisdom is that you should have enough money in the fund to cover 3-6 months’ worth of expenses. You really should shoot for the 6-month end of that range. In a recession scenario with a tight job market, it’s not unreasonable to expect that it could take that long to find work again. So take a look at your monthly budget, multiply by 6, and you’ve got your target.

If your current emergency fund is at or near zero, this is probably the part where you start hyperventilating.

Start Where You Are

Saving that much money seems impossible. It’s not. Doing it in 6 months or in a year probably isn’t possible but making a dent and getting closer is. Whatever you save will help if an emergency hits.

Your emergency fund isn’t all or nothing. Don’t let the size of the end goal keep you from starting. Let’s say you lose your job for 3 months next year, and only have enough money to cover your expenses for a month and a half. It’s still worth having that emergency fund, right? It’s a month and a half of money you didn’t have to borrow. It’s money you don’t have to pay back with interest. You’d be grateful you started even though it didn’t cover your whole financial emergency.  

So, make a commitment and start adding to your fund with every paycheck. If you’re like most people, there isn’t “leftover” money at the end of the month. You need to be intentional and plan the money you move into your emergency fund. If you’ve got a tight budget already, you may need to give something up to do it.

How do you decide what to cut? I can’t answer that for you. But picture yourself in that unknown financial emergency in the future. Think about what will feel worth cutting if you don’t have a paycheck coming in. Can you reduce your streaming services? Cut back on eating out? Cancel memberships or subscription boxes? 

Take Advantages of Opportunities to Boost Your Fund

A good general rule of thumb is to save a little extra whenever the opportunity presents itself to you, especially if you receive money you weren’t expecting. For instance, this may be in the form of a job promotion, bonus check, or a healthy tax refund. All of these are instances where you should make a contribution to your emergency fund. Sure, it’s tempting to spend that money instead, especially if you’ve had your eye on something you’ve been wanting. You don’t have to deny yourself completely. Take a little bit to do something nice for yourself, but putting the majority of your extra income into growing your emergency fund will benefit you far more in the long run.

Just Keep Going

One of the most important parts of having an emergency fund is staying committed. Once you start getting in a routine of contributing money to the account, you’ll be much more secure. Set realistic emergency savings goals for yourself and don’t stop until you’ve reached them. Or, better yet, keep going! When the unexpected happens, and more often than not, it does, you’ll be able to weather the storm with a lot less stress because you’re prepared.

Want some help to get the ball rolling with your emergency fund? Consider a GOLD Custom Club Account to get started. These accounts are completely customizable and designed to help you reach your goals faster. 


Laura Pruitt

Laura Pruitt

Laura is the Marketing Manager at GOLD. She is responsible for GOLD's communications to Members and future Members. She enjoys making financial information easy to digest and empowering Members to take charge of their financial futures.

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