From Ash Cash, personal finance expert, speaker and bestselling author.*
You may have heard that you should have at least six months of your income saved in your savings account to cover any future financial setbacks. But it’s easy to wonder why you can’t just use credit or help from family when extra cash is needed for an emergency – especially when saving for an emergency fund seems overwhelming. But what does that really mean, and can’t you just use credit or family when you need the extra cash for an emergency?
Here are some common excuses that people tell themselves about why they don’t need to save an emergency fund:
- I can barely pay my bills, how on earth could I save on top of that?
- I can ask my family for money if I really need it.
- There are options to help me in a bind, like a credit card or payday loan.
- I’m too young to need to save that much money right now, and can do it when I’m older and making more money.
Let’s say you decide to go one of these three routes instead of saving your own money…
- If you can barely pay bills now, you will have a hard time catching up with your debt after the emergency is over.
- If you borrow money from your family or friends, you will put a strain on that relationship, and they may become resentful of you if you don’t pay them back quickly.
- If you use credit or loans irresponsibly, you may ruin your credit or fall into a debt spiral.
- If you don’t start saving when you’re young, you’ll miss out on the benefits of compounding your cash and won’t have the luxury of having planned ahead.
So what is an emergency fund anyways?
The Simple Dollar breaks down what an emergency fund should be with their definition:
“An emergency fund is cash that you’ve saved up for the sole purpose of helping you maintain your normal life through the emergencies that life hands you.”
What are some emergencies people prepare themselves for by making an emergency fund? Check all that could apply to you.
- You get a new job and can now afford to pay your bills and debt while you await your new paycheck cycle to start by transferring some of your emergency savings into your checking account.
- Your car dies and you must get a new one, but you have money to put down a large down payment, getting you a new car and keeping your monthly payment at an affordable rate.
- Your new car’s check engine light goes on, and now needs extensive work. You need your car to get to work, and have saved enough to fix it quickly, while using your insurance to get a rental car during the downtime.
- You twist your ankle from playing basketball and can’t afford to cover the bills while you’re out of work for weeks.
- You buy your first home, and during the winter your furnace breaks, costing you over $6,000, which you’re able to afford to keep the heat on for you and your family.
- You finally get a meeting with the board to pitch your big idea and can afford to go out and buy yourself a nice suit.
How many did you check? Can you see yourself in any of those situations in the future, or did you come up with your own? And I know your next question… Where do I put my money to receive the biggest bang for my buck?
Bankrate.com recently published a comprehensive comparison guide by surveying 4,800 banks and credit unions across the country to give you the ability to make the best decision on where to put your money. This comparison will help you maximize the yield from your deposits. Here’s a link to that guide: https://www.bankrate.com/banking/savings/rates/.
*The opinions/views expressed by Ash Cash are not considered opinions/views of BMTX, Inc., a wholly owned subsidiary of BM Technologies, Inc. BMTX is not a financial advisor and individuals are urged to obtain and consult their own financial advisors.