September 6, 2021

What’s an Emergency Fund & Why You Need One

Most financial experts suggest that you should save anywhere from three to six months’ worth of salary in your emergency fund. Here's why it's important, and how to get started today.

12 min read

Qoins Staff


Individuals who’ve had large and unexpected expenses arise can probably tell you one of two things: how incredible it was to have an emergency fund or how difficult it was to find money when they suddenly needed it. As with most finance-related problems, preplanning is a crucial factor in successfully weathering the storms we are all sure to face at some point in life. Finding a way to preplan for life’s unexpected events may seem depressing, daunting, or difficult but it’s a necessity. Take a look at the statistics, 1 in 3 Americans have zero set aside for an emergency according to a Bankrate survey. While 1 in 5 American’s earning over $100k per year is living paycheck to paycheck, only one emergency away from major financial distress. Before we go any further, let’s define what an emergency fund is, how much you should save, and when to use it. 

What Is an Emergency Fund?

An emergency fund is essentially money that’s been set aside to cover life’s unexpected events. Examples of emergency events include a major car repair, job loss, a medical emergency, or a major home repair. The money will allow you to live for a few months should you happen to lose your job or pay for something unexpected that comes up without having to take on toxic, high-interest debt. This is the real power of an emergency fund, it fends you off from taking on debt to cover an emergency. Covering an emergency with debt will leave you with a reminder of that emergency for potentially decades, and again another emergency will come up leaving you with more debt to take on. 

Think of it as an insurance policy. Rather than paying premiums to a company, you’re paying yourself money that you can use at a later date. The cash can be accessed quickly and easily if some unfortunate event happens to occur. And if you’re lucky enough to move through all of the years without ever touching your emergency fund, then consider yourself lucky! Did you know that the average cost to repairing or replacing an AC unit for your house costs $5,000! And those break every 10 years on average. These are the emergencies this savings fund is essential for.

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How Much Should I Have in My Emergency Savings?

Many banks and financial experts suggest that you should save at least three to six months’ worth of salary in your emergency fund. That way if you do lose a job, you’ll have enough money to get by for a few months until you can find replacement work.

Start by calculating your living expenses. Tally up how much you spend each month on mortgage or rent, utility bills, groceries, and vehicle expenses. Having all of these expenses covered will arm you with enough funds to combat most emergencies that may arise.

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If you’re in a double-income household and are unlikely to find both income earners unemployed at one time, you may be able to rely on the assistance of a financially stable family member. If you have insurance policies that will cover you for unexpected emergencies, you may be able to get by with the bare minimum. However, everyone should make a point of setting aside at least something for unforeseen expenses.

How am I Supposed To Save 3 to 6 Months Worth of Salary?

This step may seem like a long road, but remember an emergency fund is not supposed to be fully funded within 24 hours of deciding you need one. Take it one step at a time, start with building a $1,000 emergency fund. Some simple hacks that you can employ is roundups and setting aside money whenever you get paid, two tools the Qoins app offers. Whenever you get paid, create a financial rule that 10% of your paycheck will automatically, upon arrival, be sent into your emergency savings fund. As we like to say if you don’t see it, you don’t spend it! Do this alone can save you over $10,000 in one year alone depending on your income level. Even if it takes 2 years of setting aside 10% of your paycheck, then it is still a streamlined approach to building a robust savings without much effort. 

Round-ups is another quick and easy tactic that can help you build up an emergency fund of $1,000 in as little as 12-18 months. Qoins customers save on average $58 per month by round up their daily transactions. That’s nearly $700 in just 12 months, a great start at insulating yourself from emergencies. 

Other tactics such as side hustles can be used to build an emergency fund and then stopped the second you have the safety funds you need. Financial health and wellness do not have to be an endless grind, but there are some non-negotiable components to financial wellness, and hustling to get an emergency savings built up is certainly one of them. 

But remember, getting started and making progress with a plan today is the goal. Not stressing about how it is possible to set aside 6 months’ worth of salary today. This is a building process, and it will take time. Set a goal, create a plan that works for you, follow that plan without waiver, and watch time take care of the rest. 

Knowing When to Use It

There may be times when it will be tempting to use your emergency money toward taking a vacation, paying off significant debts, putting a down payment on a new home, funding a lavish wedding, or any other significant expense that arises. That’s why you should always create a list of acceptable expenses and rules for your fund. Ensure that they are actual emergencies—things such as your living costs during periods of unemployment, sudden medical problems, repairs to your home because of a natural disaster or fire (or serious furnace-type breakdown), unanticipated veterinarian bills, unforeseen vehicle repairs, or surprise tax bills.

The whole point of an emergency fund is to prevent you from having to add to your debt in times of need or to scramble to wrangle money at the last minute. You want to be able to focus on the crisis, not raising money to cover it.

Should I Pay Off Debt Before Saving in an Emergency Fund?

There are pros and cons to this. If you are paying off high-interest debt, that generally should come first because it is such a financial hardship. That said, it’s good practice to build a sound financial habit of paying even a little toward an emergency fund while reducing high-interest debt.

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The Bottom Line

It can be challenging at times to live below your means, but you’ll be thankful that you did when that rainy day arrives and the impact on your financial health is minimized because of your good financial decisions. The only person you can really depend on to get you out of trouble is you. Don’t rely on family, friends, government safety nets, insurance policies, or just plain luck. Bad things can and do happen to everyone, and working towards financial well-being should be prioritized in the same way physical health is looked after. 

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