Budgets and Money

Why Everyone Needs an Emergency Fund and 3 Steps to Help You Get Started

Emergency Fund Needs and How to Get Started

The expression “save it for a rainy day” has long served as a warning for people to set aside enough money to sustain them in the event of an emergency. When a “rainy day” or unexpected expense pops up, having an emergency fund can be the financial safety net that most of us need to catch us if money gets tight. Yet despite the importance, did you know that nearly 50 percent of Americans continue to save very little or even none of their paychecks in order to build an emergency fund.1

Unfortunately, too many people make the mistake of not establishing an emergency fund knowing that they have a credit card or two to fall back on when they don't have enough cash. However, if you're not paying the balance in full at the end of the month, then you're compounding the problem by getting tangled in an interest cycle that could cost you even more.

We all know life can be unpredictable. Inevitably, things such as a broken refrigerator, unexpected vehicle repair, or out-of-pocket medical expense can leave you with few financial options when you have an immediate need for cash. An emergency fund can provide you with readily available money at a time when you need it the most.

The following are three easy steps to help get your emergency fund started - even if you don't think your budget can swing it:

  • Step one:

    Determine how much you can save. Begin by crunching the numbers to see how much you can set aside each week, month, or even per paycheck. If you discover that you can only save a few bucks out of your monthly budget, that's okay, because you need to start somewhere. For example, saving just $20 a week adds up to $80 a month or $960 a year.

  • Step two:

    Locate the money that's hidden in your budget. In other words, determine what you can cut back on in order to save an extra $10 or $20 a week to build your emergency fund. Most of us can quickly identify where we fritter away at least a few bucks each week, such as buying our morning coffee (instead of brewing it at home) or eating out every day at lunchtime (instead of bringing it). And if you don't think you'll save much in these two areas, try using DollarTimes.com's coffee calculator or Bankrates.com's lunch calculator to see how much you're actually spending.

  • Step three:

    Keep your emergency money out of reach. Out of sight is best when it comes to building your emergency fund. Don't make the mistake of keeping a cushion or reserve of cash in your checking account or in the form of cash. Why? Because it's too easy to spend! Unfortunately, when willpower gives in, that money can vanish quickly. Instead, open a separate savings account and forgo linking it with a debit card. Yes, that will mean that you may need to go into a branch to withdraw your money, but it will make it that much harder to access when the impulse to spend hits you.

How much should you save for an emergency?

How much you should have reserved in an emergency fund is a personal preference. However, according to the financial website Mint.com, most experts recommend having somewhere between three and six months' worth of post-tax income stored away in an emergency fund.2 For example, if your take home pay after taxes is $3,000 a month, then try to set an annual goal of saving between $9,000 and $18,000.

Unfortunately, a recent survey of 1,000 adults indicated that only 22 percent of survey respondents had enough saved up in their emergency fund to cover their living expenses for six months, while another 15 percent said they have savings equivalent to three to five months, and 21 percent can cover less than three months.3

The bottom line is that saving something is better than saving nothing at all. Don't let the fact that you're already hard-pressed for cash prevent you from establishing an emergency fund for a rainy day. Going without an emergency fund only perpetuates more debt, creating a financial hole that can be difficult to crawl out of.


1http://www.bankrate.com/finance/video/life-money/americans-feelings-financial-security-0315.aspx

2 https://blog.mint.com/saving/emergency-fund-101-how-to-start-saving-for-a-rainy-day-0113/

3http://www.bankrate.com/finance/consumer-index/americans-still-lack-savings-despite-wage-growth.aspx

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Starting an Emergency Fund

Whether you believe it or not, everyone will need an emergency fund at one point or another. It's always a good idea to have a little bit of extra money stored away for rainy days and unexpected expenses. This article discusses a few ways to start an emergency fund for unforeseen circumstances. For more information, visit the Protective Life Learning Center.


All Learning Center articles are general summaries that can be used when considering your financial future at various life stages. The information presented is for educational purposes and is meant to supplement other information specific to your situation. It is not intended as investment advice and does not necessarily represent the opinion of Protective Life or its subsidiaries.

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Neither Protective Life nor its representatives offer legal or tax advice. We encourage you to consult with your financial adviser and legal or tax adviser regarding your individual situations before making investment, social security, retirement planning, and tax-related decisions. For information about Protective Life and its products and services, visit www.protective.com.

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