The Emergency Fund isn’t just for job loss

The other day when I left work, I turned my car on and checked messages on my phone. A few seconds later the engine kicked on and made the loudest sound I’ve ever heard it make. I wasn’t even sure it was my car until I turned it off.

Turns out, someone had stolen the catalytic converter out of my car. There’s been a 1,600% uptick in catalytic converter thefts in my state, and the parking lot for my job is a monitored lot, but that’s besides the point.

Some states, such as Colorado and California, require OEM catalytic converters be used when a replacement is put in. This can make the theft cost thousands of dollars to replace. Sure, insurance might cover it (provided you have comprehensive), but you still need to cover the deductible.

Enter the emergency fund.

An emergency fund is a cash reserve specifically set aside for major unplanned expenses or emergencies. While this includes loss of income, it can and should also cover expenses like: major car or home repairs, medical bills (for humans and pets), unplanned travel (such as for a death in the family).

The important take away of an emergency fund is: don’t be afraid to use it when you need it. Many of my friends admit that while they have an emergency fund, they are hesitant to use it when a major unexpected need comes around. But, this is literally the point of such a fund.

How big should an emergency fund be?

The general “rule of thumb” is an emergency fund should be big enough to cover three to six months worth of expenses.

Saving this much money takes time. When I first started out, it took me about 3 years to save that much money.

I recommend making the goal smaller at first-say $500, then working your way up. There are many people who eventually work their way up to a full year of expense replacement.

Just remember to start small: If you set aside $20 a week, by the end of the year you’ll have slightly over $1,000 saved.

You could also save unexpected income, such as gifts, tax refunds, or winning a contest.

Where to keep the emergency fund

The best place to keep the fund is a high-yield savings account. This is mostly because you many need quick access to the money, but also want a fairly competitive yield. Just make sure the bank or credit union is FDIC or NCUSIF insured.

You could also use a money market account, but depending on where your account may be, it could take a day or two to get your cash.

Another thing you can do, depending on large your fund is, is set up a CD ladder.

Here’s a way to do it with a nine-month emergency fund that uses two CDs:

  1. 3 months cash in a savings account
  2. 3 months in a CD that matures in 3 months
  3. 3 months in a CD that matures in 6 months.

When the 3 month CD matures, change it to a 6 month CD. You could also do two 6 month CDs, but wait 3 months to start the second one.

Could you put your emergency fund in a mutual fund, crypto, or some other asset? Sure, but since those can be highly volatile, the fund could lose value which makes it harder to grab money that needs to be accessed quickly.

Keep saving after reaching your goal

Sometimes, life doesn’t just give you lemons, it chucks them at you out of a canon. In cases where you have an emergency that requires more than a six-month cushion, you’ll be glad to have the extra money on hand.

If and when you use your fund, you’ll want to replenish it. But, in the meantime, you’ll likely be grateful for the excess or having the fund in the first place.

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