Kiplinger Today


Why You Need an Emergency Fund

I learned this lesson the hard way: Everybody needs an emergency fund. Not just those of us living paycheck-to-paycheck or coming fresh out of college. We all need money set aside for a rainy day.


Because you could lose your job or your refrigerator could die or you might have to get an emergency root canal. And if you don't have enough cash on hand, you don't want to find yourself looking around the house for valuables to pawn, racking up credit-card debt or contemplating a payday loan.

In my case, I had a surprise tax bill. I got a refund the previous year, so I didn't expect to owe the IRS -- especially not close to $3,000. Plus, my husband and I had been paying down high-interest debt. That left our account balance pretty low at the time our accountant finished our tax returns -- only one week before the filing deadline. To top it off, I had a quarterly estimated tax payment due at the same time.

So I wiped out my account to pay Uncle Sam and relied on birthday cash from my mom to buy groceries until my next paycheck arrived. It was a terrible feeling being broke -- even if it was just for a few days.


No more excuses

I have only myself to blame, though. Equal parts procrastination and denial had prevented me from creating an emergency fund.

While my husband was in graduate school and I was the sole income earner, my excuse for not setting aside cash for a rainy day was that I didn't have extra cash (the procrastination part). Once we both were working, I figured we had enough left over in our bank account at the end of every month to cover minor emergencies (the denial part).

Maybe you've been making excuses, too. Here are some common ones, and why they don't hold water.

Excuse #1: I can't afford to set aside money

If you think you don't have any spare cash in your budget to save for an emergency fund, where do you think you'll get the money to pay for an actual emergency? Selling plasma? Hocking all your belongings on eBay?

You need an emergency fund the most when you're just starting out or living paycheck to paycheck, says Jan Dahlin Geiger, a certified financial planner with LongView Wealth Management in Atlanta. An unforeseen event could devastate your finances and force you to borrow money. You won't get ahead financially if you're in debt, Geiger says.

The conventional wisdom is to have enough set aside to cover three- to six-months' worth of living expenses. That doesn't mean you have to stash that much cash at once. Nor does it mean you have to have a big salary to have enough to spare for an emergency fund. Saving is a function of discipline, not income, Geiger says.

A good way to get started is with a tax refund (most taxpayers get one).

You probably have even more money to spare and don't realize it. If your federal tax refund was anywhere close to the average of $2,600, you probably are having too much withheld from your paycheck. Use our quick and easy calculator to see how much you can add to your monthly paycheck. Put that extra cash into your emergency fund each month.

Then track your spending for a month to figure out where you can cut back, and divert that money to your emergency fund. If you have direct deposit at work, you can have your employer deposit a portion of your paycheck into a savings account. For help finding ways to keep more cash, see Save Money on Practically Everything.

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