If only one thing is certain right now, it’s that things are changing all around us. Being able to predict what your next week, month, or year may look like is imperative to plan for you and your family — especially when it comes to personal finance. So, what can you do in the face of job insecurity, unexpected expenses, and other events that are out of your hands? Create an emergency fund.
Ideally, an emergency fund would consist of enough money to cover four to six months of expenses. If your job is stable and your income is steady, it’s safe to err on the low side of this recommendation. If those factors are often changing, then it’s better to save more in preparation for possible loss of income. But these aren’t the only events in which an emergency fund could save you — medical events, car accidents, and urgent household repairs are all surprise expenses that have the potential to turn your financial situation upside down in seconds. With an emergency fund, you can help cushion hard hits to your budget and keep your family’s finances afloat.
For an emergency fund to be most effective, it should be created following one basic rule: your funds should be stored in a money market or simple checking account that is completely separate from your other savings (bonus points if you choose to keep your funds at a separate bank). This serves two purposes. One, those account types allow your emergency fund to be accessed both quickly and without difficulty, by either debit card or check. Two, the clear separation of the fund discourages you to dip into it without much thought.
How can you tell what to use your emergency fund for? First, try asking yourself if what you are considering spending money on is a want or a need. If you have any hesitation about classifying the event or item as a need, then more likely than not, you shouldn’t use your emergency fund for it. If you do consider the event a need, you must decide how urgent the need is. Is it an expense you can save and pay for in the next month? Or is it absolutely necessary that it be covered as soon as possible?
At the end of the day, an emergency fund is there to protect you and your family. If an expense arises that is urgent and necessary, then don’t hesitate to use it — after all, it’s what you worked hard to save for.
Hannah Tallan is currently studying Finance at the Oregon State University Honors College. With a passion for financial education and a love for Oregon, she plans on becoming a CFP and helping Oregonians handle their personal finances with confidence.