Guide to Short-Term Emergency Funds

Based on a true story.

One winter night, Dave and Jill were enjoying a quiet evening while their children slept. Just then, their three-year-old son, Charlie, came down the hallway wheezing. He had been sick with a respiratory illness.

"I-I can't bweathe!" he wheezed, his eyes wide with panic.

"Oh no! Dave, get the car and take him to the hospital! I'll stay here with our other children." Jill said.

A blizzard had been raging outside for hours. When Dave opened the front door, he saw just how bad it was. There was no way their two-wheel drive car was getting out of that driveway that night.

They decided to call an ambulance. Even though they worried about the expense, they knew that their short-term emergency fund would probably cover the cost.

While they were waiting for the ambulance to arrive, Charlie started doing a little dance and said, "Potty." Jill helped him to the bathroom. After Charlie finished, he looked much more calm. Dave and Jill also noticed that he was breathing normally again.

It was about that time that the paramedics showed up. Jill explained what happened and how Charlie seemed to be doing fine. One of the paramedics said, "If you want, we can take a look at him just to make sure. It won't cost you anything."

"What do you mean?" asked Dave. "If we don't transport, there's no charge," said the paramedic.

Dave and Jill obliged. So the paramedics checked Charlie from head to toe, listened to his chest and said, "Well, he seems fine now. Probably just a panic attack. Or... maybe just a different kind of emergency."

The paramedics chuckled while Dave and Jill just about cried with joy. "Thank you for coming," said Dave. "That's the best paramedic visit we never had to pay for!"

An emergency fund is a stash of cash set aside specifically for unexpected expenses or income loss. It's a safety net designed to cover things like medical emergencies, car repairs, job loss, or other unforeseen events without derailing your long-term financial goals.

If people don't have an emergency fund, then they often turn to credit cards when emergencies arise. If they are unable to pay off the credit card bill in full, then they will be charged interest on the outstanding balance. The high interest rates on credit cards can make it difficult to pay off the debt, which can lead to a cycle of debt that is difficult to escape. Even a small emergency fund can be enough to avoid a situation like that.

We make a distinction between short- and long-term emergency funds because once you are at the point where you are building your long-term emergency fund, you may want save your short- and long-term funds in different places and use them for different scenarios. This is how we define short- and long-term emergency funds:

• Short-term emergency funds are meant to cover unexpected expenses that are small or short-term (e.g. small home or auto repairs, medical co-payments or deductibles).
• Long-term emergency funds are meant to cover unexpected expenses that are large or long-term (e.g. job loss, major medical emergencies, large home or auto repairs).

Emergency funds are meant to be used for true emergencies. So if you have an upcoming expense that you can plan and save for, then you should do that (e.g. using a separate account) instead of using money from your emergency fund.

The answer to this question really depends on your individual circumstances and what you are comfortable with. For short-term emergency funds, here are some simple guidelines that you can use as a starting point:

1. Start by saving $500 as quickly as possible.
2. Then increase that amount to $1,000.
3. Finally, work to save between 1 to 3 months worth of essential expenses (depending on how much of a cushion helps you feel comfortable). If you have a spending plan where you are tracking your monthly expenses, then this exercise should be easy.

These are general guidelines, but consider whether the following scenarios also apply to you.

What If I Have A Lot Of Debt?

If you have a lot of debt that prevents you from saving very much each month, then it might not always be wise at this point to try to save 1 to 3 months worth of expenses. If it takes you too long to fund your emergency fund, then you can lose motivation and give up. If you have debt, then you need to get to the next step on your journey as quickly as possible where you start eliminating that debt.

Debt can be one of the biggest roadblocks on your journey to financial freedom and eliminating that debt can be one of the biggest boosts you can give to your financial future. So if it takes you more than a couple of months to save your short-term emergency fund, then you may want to keep your short-term emergency fund closer to $1,000 or maybe around 2 weeks worth of expenses so you can move on to the next step and start eliminating debt as soon as possible.

What If I Don't Make Very Much Money?

If you don't make very much money and are living paycheck to paycheck, then it may be difficult to save 1 to 3 months worth of expenses. In this case, you may need to focus more effort on getting out of the paycheck to paycheck cycle.

What does it mean to live paycheck to paycheck?

Living paycheck to paycheck means that you don't have enough money to pay for future expenses until your next paycheck. In other words, if you live paycheck to paycheck, then you will be out of money (or nearly out of money) by the time your next paycheck arrives.

This situation often happens when you spend more than you make and you do not have any money set aside for an emergency fund, which is intended to provide a buffer against unexpected expenses or emergencies.

So how do you break out of the paycheck to paycheck cycle?

Since living paycheck to paycheck largely means that you don't have an emergency fund, then the way out of that situation is to...

... save up an emergency fund.

But how do you save up an emergency fund if you don't have any extra money to save? Follow these steps:

1. Get on a spending plan. This step is the key to accomplishing your financial goals because it gives you a plan to follow that helps you spend wisely and with purpose.
2. Decrease your expenses. We typically have more control over how much we spend than how much we make (at least in the short-term). So the second step is to evaluate your spending plan and identify ways to reduce your monthly expenses. (There are more ideas for saving money and decreasing expenses below.)
3. Increase your income. Increasing your household income by getting a raise or a new job, for example, might not always be a legitimate option (at least not immediately), but this might be something to work toward.
4. Eliminate your debt. Having debt is like giving yourself a paycut. But once your are free from debt, it is like giving yourself a pay raise. More financial options will open up for you once you are debt-free.

Here are some ideas that may help you to cut expenses, earn more money, and set money aside for your emergency fund:

• Ask yourself where you can reasonably cut expenses in your spending plan.
• Get into the habit of meal planning instead of going out to eat. You will be amazed at how much you can save by planning your weekly meals and snacks.
• Get your grocery shopping done in one trip a week instead of 3-5 trips.
• Shop for deals and use coupons for groceries.
• Turn the thermostat a degree or two warmer in the summer (and use more fans) or a degree or two colder in the winter (and use coats or blankets).
• Look for other ways to save on utilities. For example, does your electric company have off-peak hours when electricity is cheaper? Those could be times when you do things like laundry or run the dishwasher.
• Do your benefits at work include ways to earn money or get reimbursements through wellness or other programs?
• Cancel unused or unnecessary subscriptions.
• Pay off high-interest debt.
• Sell cars that you still owe on and replace them with more affordable cars that you can pay off quickly.
• Set up direct deposits to your emergency fund on payday to ensure that you save consistently.
• Pick up a side hustle or an extra job.
• Take on extra hours at your current job.
• Ask for a raise at your current job.
• Look for a new job (within your current company or a different one) that pays more.
• Use unexpected money like gifts, bonuses, tax refunds, etc. to build up your emergency fund.