Why You Should Start an Emergency Fund

Nov 4, 2023

It’s been an expensive year for my family. 

A leak in our irrigation system emerged in January after we realized the person in November who blew out our sprinklers had not shut the water off completely. We paid a $420 water sewage trash bill in February and then spent $1,000 to install a new backflow preventer in June. Luckily the city of Boise approved our leak adjustment request and we got some money back.

In August, our dog Chewy had a mini-emergency. One day he seemed to favor one side of his head. We looked in his ears to see if there was something lodged in them, but couldn’t find anything. He was still favoring the one side for another day so we decided to take him to the emergency vet. Turns out he had a tiny seed near his eardrum, lodged in by some earwax. He didn’t seem to have any damage to his eardrum though, so that was the good news. The bill: $383. 

Our problems weren’t over. Two days later, we received quite the shock at the tire shop. My husband had dropped off the Honda for a routine oil change and the tech called to tell him we had some struts that needed replacing. Shane misheard the tech tell him how much it would cost, thinking it would be about $500. He texted and called me to say, “We have a problem.” The total bill to replace all the struts and do an oil change was $1,880. Yikes! But because I check our budget for a few minutes every day, I knew that we had the money to cover it. It would mean removing money from some of our categories, which I wasn’t thrilled about, but it was doable. I said calmly, “We can make it work.”

This is how I had to move money around in You Need a Budget (YNAB) to fund the car emergency. It was so depressing to see our car savings disappear in one day!

So painful! 

Having three emergencies this year was not fun for us as it set us back in our goals by over $2,000. There is a lot we could have done with that money! 

But despite the pain of taking a financial hit, we’re grateful we had a budget and cash set aside to fund those emergencies. We didn’t have to go into debt or incur banking fees and that was a relief. 


Set Aside $1,000 to Start–And Keep Adding to It

If you haven’t already, I recommend starting or increasing your emergency fund, because you never know when you might need it. If you have $1,000 squirreled away for a rainy day, that puts you ahead of 45% of Americans. But $1,000 won’t cover more than a couple of big emergencies, which is why you should aim to save at least 3-6 months of expenses. And if you want to save more than that, then go for it! Focus on building momentum early on and you’ll create a healthy habit for years to come.

I know. That’s a lot of money. Because we spent down a chunk of our emergency funds this year that means we have to get the fund back to a healthy level. That will take time, because as a young family we have a lot of expenses.

Where to Park Your Emergency Fund

Consider storing an emergency fund in a high-yield savings account. You’ll earn some interest and have fairly quick access to your stash (usually 3 business days). Many online banks will offer signup bonuses, and as long as you meet all the requirements, you’ll earn the bonus. Also, online accounts only take a few minutes to set up and your credit won’t take a hit. Keep in mind that not every bank is a good bank (some do not offer FDIC insurance), so read the fine print and reviews first. The interest you earn on a high-yield savings account can vary, so it pays to shop around for a good APY. 

I keep enough money in my checking account to pay the bills and anything extra goes into the high-yield savings account. You can look into getting a high-yield checking account, too, if there’s a bank or credit union nearby that offers one.

Common Emergency Categories 

Rather than using one giant sinking fund (sinking funds are savings you will spend), we use several categories for our emergency fund. This makes it possible for us to track our spending on those emergencies in YNAB. 

Our categories:

  • Medical 

  • Chewy vet/ dog boarding 

  • Travel

  • Home Supplies/ Maintenance 

  • Car Major Repair/ Part Replacement 

  • Car Maintenance

  • New Car

As Hannah explains so well in her YouTube video, your emergency fund doesn’t need to be some vague category that you never touch. Give it a purpose! All of the categories I listed above will cover life’s emergencies. For example, when I look up my Reports in YNAB, I can quickly find out how much I spent in the Medical category in a certain period and view the transactions right there.

If you’re starting to build your emergency fund, keep it in one category labeled Emergency Fund until you’ve reached a level that helps you sleep well at night. Then consider adding or tweaking categories that are relevant to you. 

Can I Use a Credit Card to Pay for an Emergency? 

Short answer: Yes, if you’re paying your balance in full every month and you can pay off the emergency bill.

You may be using a credit card for convenience, but the interest charges, late fees, and larger balance may become an emergency if you don't pay it off. And thinking, “I’ll earn miles or rewards points so of course I need to use the card!” is incorrect because interest and other fees gobble up the rewards. Paying for an emergency with cash might be the best option in this scenario. 

Maintain Your Emergency Fund

Just like house plants, your emergency fund needs attention to grow. Setting up automatic transfers from your checking account to savings account(s) every month makes it easier to do. Since I use YNAB, though, that means I am only assigning income to emergency categories in the app, and not transferring money. Once I see a high number in checking (e.g. tax refund), I can move the excess into my high-yield savings account.

The Bottom Line

Emergencies are inevitable and you will want funds set aside to pay for them. It’s normal to spend from your emergency fund, just make sure to replenish the funds when you can. One of the first things I discuss with clients is their emergency fund. While it can take some time to save up a decent chunk of money, the peace of mind sure is worth it. Book your free discovery call to discuss your emergency fund needs today.