The basic definition of an emergency fund is cash set aside to pay for unexpected expenses such as home or auto repairs, medical expenses, or unemployment. I know you’re smart and already know what it means, but why should it matter to you?
Before we go any further, I vote we change the name from emergency fund to opportunity fund because language matters. Wouldn’t it feel better to have the opportunity to pay cash for an unexpected cost instead of thinking of it as an emergency? Yes, yes it would.
So why do you need one? Bottom line . . . to feel safe and make better financial decisions.
Those of us who have unfortunately been the recipient of a large and unforeseen financial situation would undoubtedly confess one of two things: how grateful we were to have planned and set aside the cash or how difficult and defeating if felt to try and find the needed money.
An opportunity fund is meant to be a safety net to keep you afloat in a financial crisis. It prevents you from having to rely on high interest rate loans or using a credit card that you won’t be able to pay off in the immediate future. For others, it means avoiding reaching out to a trusted friend or loved one in a time of financial need.
While putting money aside for your opportunity fund might not seem like the most exciting use of your paycheck, it’s an integral step on your financial freedom journey. Think of it as your personal insurance policy. Instead of paying premiums to a company, you’re paying yourself so that money can be of service later.
So, the next logical question is, “How much should I save for my opportunity fund?”
I’ll start with answering that question with one of my own, and something I suspect you haven’t considered yet. What number feels good to you? We often seek guidance from outside sources before turning inward and checking in with ourselves. What is your intuition telling you? What number would give you that peaceful, easy feeling and help you sleep better at night? It’s important to realize that number varies greatly for everyone and there is not a right or wrong answer.
Now that we’ve checked in with you, I’ll suggest some guidance and let’s see how we align.
The financial world consensus is generally having at least three to six months of expenses covered by your opportunity fund. This is just a general rule of thumb because the right amount depends on your personal circumstances. For instance, you might need more if you do freelance or seasonal work.
Start by calculating your monthly living expenses. How much are you spending each month to cover your mortgage or rent, utility bills, insurances, vehicle expenses, groceries, etc.?
Here’s a fun fact . . . The average American household spends $5,111 on monthly expenses, according to the February 2022 Consumer Expenditure Survey from the U.S. Bureau of Labor Statistics (BLS). Given that information, a reasonable opportunity fund would be between $15,000 and $30,000.
If the 3-to-6-month rule just isn’t realistic for you right now, don’t panic. Let me encourage you to start somewhere, make it an automatic savings amount, and have the goal of increasing that amount over time. The important takeaway here is that you’re prioritizing yourself and your future by saving.
Starting small is okay. Even if you just set aside $20 a week, at the end of 2 years you would have saved just over $2,000. Wow! Increase that amount to $40 a week instead, and you would have at least $4,000 in 2 years. Never underestimate how small, steady goals make big future impacts.
Where should you put your opportunity fund?
Ideally you would use a high-yield savings account for a few reasons:
- Easy access to the funds
- It’s separate from your daily bank account
- You’ll earn a small amount of interest
- It’s FDIC insurance up to $250,000 per depositor
Remember the idiom of saving for a rainy day? Keep that in mind when you’re tempted to use your opportunity fund. Make sure you set clear boundaries for what’s consider an emergency and everything else.
Unfortunate things happen so shift your mindset to make your financial wellbeing a priority. You are the only person you can truly depend on to save the day. Imagine how empowered you’ll feel when that rainy day arrives, and the financial impact on you and your family is minimal.
By: Amy Getz