Our emergency fund is finally fully funded. WHEW! Since I am switching to full-time self-employment, we have been really focused on building it back up. A couple of months ago, I drained our emergency fund completely so that we could pay the ol’ student loans.
Currently, we have around 12 months of expenses in our emergency fund. If we didn’t have some sort of emergency fund, I honestly don’t think that I would feel as comfortable about self-employment.
I am confident in my services that I offer, but you never know. What if I have a completely uneventful month where my expenses are higher than my income? What if something in the house breaks or our basement floods?
Luckily, we also have a fairly low budget. This makes saving up for 12 months of expenses a little bit easier. However, I will of course not say that saving up for a fully funded emergency fund is the easiest thing on earth. It is definitely hard. Saving up for an EF is a lot more enjoyable than paying off student loans though 🙂
Holly is another fellow freelancer, who recently made a post about why she’s happy that she has an EF. They are important!
Why is an emergency fund important?
An emergency fund is important for many reasons. For the sake of this post, an emergency fund covers all “emergencies,” even though I do understand that some families have a “job fund,” “house fund” and so on all in different categories.
An emergency fund makes living life a little bit more comfortable. If you don’t have to worry about living paycheck to paycheck, or about how to pay for the next thing that breaks, it’s probably because you have an emergency fund. Of course, you don’t want things to break, but if something unexpected does happen, then it does not have to be the end of the world.
An emergency fund can cover all types of events. Maybe a medical problem arises and you need to pay for some of it out-of-pocket.
Did you lose your job? An emergency fund can help keep you afloat until you find your next job.
An emergency fund can also cover something going wrong or breaking in your house. What if you need a new roof? Or a new furnace? Or your basement floods? These things are not cheap.
How do I determine how much I need?
It is a little difficult to determine how much each person/family should have in their emergency fund. I would say that it should be whatever you are realistically comfortable with.
Some people feel perfectly fine about not having a large emergency fund and consider their credit cards their emergency fund, whereas others really think that a large emergency fund is important. I am one of those people who think that a large emergency fund is best. I am a big worrier that something will break!
If you have debt, some say that you shouldn’t carry more than $1,000 in your emergency fund. This is because you should be focused on debt instead of emergency funds which don’t gain much in interest.
Since I plan on switching to self-employment, I want a larger emergency fund. I don’t want one bad month to make paying my monthly bills feel impossible. Having 12 months of expenses feels like a comfortable amount to me. My EF could potentially cover 12 full months of $0 earnings, or it could cover a mixture of lower income and something happening to our home.
Generally, if you own a home, have an unstable job (such as a commission-based job), have an older car that might need repairs soon, or a larger family, then you will want a larger emergency fund. With a home, things break. With an unstable job, you might have a bad month, and an EF can give you peace of mind. An older car might need a repair, and if you have a larger family, well, there is a bigger chance that something unexpected may happen.
Do you have an emergency fund? Why or why not?