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What Exactly Is An Emergency Fund? (And What It's Not)

Update: July, 2020 - Well, it looks like the recession has arrived suddenly! With the Coronavirus/COVID19 pandemic currently sweeping the world, I put together a FREE Financial Crisis Survival Guide (blog post with available printable PDF) to help those of you either preparing for or responding to a cut in hours, layoff or termination.

Here's the blog post for the guide: Financial Crisis Survival Guide (Version: COVID19) Blog Post Version

Here's the free downloadable PDF version of the guide: Financial Crisis Survival Guide (Version: COVID19) Downloadable PDF version 


What IS an actual emergency?

Have you ever wondered someone meant when they used the term, “emergency fund”?

I know it probably seems like a simple enough concept to many of us, right? But, I've actually been surprised by how many different definitions are out there in the world. 

Since I started coaching and blogging, I've heard some really "interesting" ideas about what an emergency fund is.

So, I think it's good to go ahead and define it more narrowly, especially for our budding debt-eliminators. 

You may be craving more clarity and precision so that you can get down to business.

And to drill down a little further, whenever someone asks the question about what an emergency fund is, I perceive that it’s not so much a question of “what is it?”, actually.

It's really more of a question of “what is it made up of?” or “what constitutes an actual “emergency?”.

All that said, this article is meant to clarify the murkiness..


The Basics

The basics of an emergency fund. It's your "Murphy repellant".


To some degree, we all know that an emergency fund is money that you set aside for that “rainy day” emergency or attack of the darker forces in life.

Dave Ramsey calls an emergency fund “Murphy Repellant” as in Murphy’s Law.

I think we all want as much of that as we can get, right?

It serves as a buffer between you and potential imminent financial disaster at the hands of an unforeseen event.

But the particulars of what an emergency is and what it is not is pretty murky most of the time. 

So, we’ll address all of that here.


Do you "get down" with Pinterest? If so, would you consider pinning this to your favorite board?


Emergencies While Living Paycheck To Paycheck:

The overall concept of having an emergency fund is still very much a challenging one for the 78% of the American population that lives paycheck to paycheck (CNBC)

Most of the data says that many families in this economic posture would have a hard time scraping together $500-800 for an emergency (Forbes)

That’s a problem and we’re passionate about helping solve it by helping you to not be a part of that statistic anymore.

Part of purpose for producing content like this is to try and put a dent in the number of folks living this paycheck to paycheck cycle. We can only do it one person, one couple and one business at a time.

Part of the way we accomplish that is by clearly defining a way out of this perpetual black hole of, living paycheck to paycheck, taking on debt and therefore constantly living on the edge of insolvency. 

To break this cycle, we recommend our "7 Steps To Stop Paycheck To Paycheck Living" guide.


If you want the printable pdf guide, click here or on the image above.


What Constitutes An Actual Emergency? 

So by definition, an emergency fund is a pile of cash that you set aside for real emergencies.

That’s probably pretty obvious, right?

But as apparent as it may be, we actually have to drill down a little more specifically than that because of how confused our culture has become in recent decades about the actual definition of “emergency”.

Yes, nowadays we actually have to define what an emergency is.

Part of the reason for that is that the machine that is our modern marketing industrial complex is trying to tell you that your normal multi-daily hunger pangs are an “emergency"and that you need to run down to Checkers and spend $15 on junk food that you actually can’t afford and will ultimately destroy your health.

Sound familiar?

Examples like this make it easy to see that we are the most marketed to generation in the history of the world.

So, let’s continue by spelling it out. Dictionairy.com defines an emergency as:"a serious, unexpected, and often dangerous situation requiring immediate action.”

As many of us have experienced, that definition could definitely apply to money.

Some examples of an emergency: losing your job, having to pay deductible for a medical emergency or a homeowners or car insurance claim, breaking a tooth, breaking a leg, breaking your glasses and about a million others. 

Please do share some of yours in the comments below. It really helps the community enumerate the vast possibilities. 

Here's a quick side note, for people eliminating debt: We recommend at $1000 as a “starter emergency fund” because that helps to get you out of the cycle of using your credit cards when an emergency arises. Then, once you’ve eliminated debt, we recommend 3-6 months of cash reserves for bigger emergencies.


What Is An Emergency Fund?

An emergency fund ultimately should be at least 3-6 months worth of expenses set aside in a reasonably-accessible form (like a savings account, money market account or (well-hidden) stash of actual cash).

I say “reasonably-accessible” because, if you’re anything like me your regular checking account is just TOO easy to access for those “emergencies” defined by the earlier mentioned marketing industrial complex.


More Emergency Fund Resources

Here are some related posts on how to get your emergency fund in place.


Real Life Example - Our Most Recent Emergency

I still can't believe the airbags didn't deploy. Wow...


An actual emergency would be like the following situation my wife and I were in not so long ago.

Life can change in the blink of an eye. Better to have an emergency fund in place.[/caption]

We were driving down an unusually curvaceous country road in northern Georgia early one September evening. We were just taking in the delightfully colorful autumn sights and enjoying the cooling post-summer weather.

An oddly placed and now-infamous hair pinned curve abruptly ended our peacefully tranquil ride. We suddenly found our Toyota 4Runner embedded into the grill of a 3/4 ton Dodge Ram pick up truck. 

Yep, head on collision is right.

By the grace of God, no one was hurt and both parties were exceedingly kind, gracious helpful to one another. Thank The Lord for the remnant of decency in our society, right?

And as an added measure of grace, by the time the two trucks collided, both vehicles had slowed down sufficiently to avoid bodily harm to anyone in either vehicle. Actually, no airbags deployed in either vehicle.

Rather miraculous if you ask me. :)


Totaled Car, Now What?

Thankfully, paid in full with cash...


So while no one was injured, our poor 4Runner was instantly totaled, the front end crushed and twisted almost beyond recognition.

I could tell as soon as I jumped out of the vehicle to assess the situation. Bummer!!

Again, by the grace of God, everyone was okay, but now we were in the position of instantly being without a vehicle.

Emergency? Yep!

Long story short, our insurance company offered us a settlement that was really only a little more than half the value of the vehicle (probably less than half in reality, as I had JUST put new tires and brakes on it). :(

Yes, this was definitely another serious bummer, but we weren’t going to sweat it too much.

We were still reeling from the fact that no one got hurt and that we were actually financially prepared for emergency like this.

And speaking of financial preparedness, we ad an emergency fund (coupled with our already mostly funded Car Replacement "sinking fund” that allowed us to purchase a new (used) car without having to borrow ANY money for it.

Not exactly how we wanted to spend the money but heck, it's WAY better than being in the position of having to take out a car loan.

So in essence, the existence of those funds, reduced our number of emergencies by one. Allow me to explain.


One Emergency, Instead Of Two 

Keep on saving. You just never know when you're going to need it.


I use this illustration all the time with students to reinforce the point that, once you have an emergency fund securely in place, it reduces the number of emergencies by one.

But what does that mean? It means that, when you don’t have the EF, you actually have two emergencies.

You have the actual emergency itself AND you have a money emergency. Not fun. Double the stress.

Have you ever thought about it that way? Me either. I didn't start thinking this way until I started getting out of debt myself over ten years ago.

So now that we’ve covered what an emergency is and what emergency fund is for, let’s proceed by defining what an emergency is not.


What An Emergency Is Not

Mall. Not an emergency. :)


So, your emergency fund is fully funded (whether it’s your “baby emergency fund” of $1000 or your full "3-6 month emergency fund).

Let’s talk about some scenarios that you may be thinking would constitute emergencies now or in the past, but that I’m going to coach you into thinking of more long term “irregular expenses”.

It might come a surprise that ideally, an emergency would not include things like the following: replacing the roof on your house, replacing your home’s heating/air-conditioning system, replacing your worn-out car, buying clothes for your rapidly growing children. 

These would actually be classified as “irregular expenses” that could in fact be budgeted for in a proactive manner to such a degree that, when the necessity for replacement arises, there is actually money set aside in a “sinking fund” (a kind of savings account) to cover the associated costs.

In fact, in our earlier example of Angelica’s and my car accident, part of the money that we used to buy a new (used) car came from our “Car Replacement” sinking fund and part (a very small part, actually) came from our emergency fund.

Now let's talk about how to get your emergency fund in place in the context of our "8 Steps" system.


The 8 Steps To Obliterate Your Debt

This is the blog post that outlines the 8 steps I followed to eliminated $43,000 in debt in 2.5 years.
And whether this is your first or thousandth time on the blog, I want to make sure you have this “8 Steps” framework that ALL of our content is centered around. 
These are the steps I personally followed to obliterate $43,000+ of debt in 2.5 years
Maybe your number is bigger, maybe it’s smaller. Either way the principles are the same and I want you to have them.
0. Stop All Retirement Investing (Until Step 4)
2. Starter Emergency Fund of $1000
3. Eliminate Debts Smallest To Largest (a.k.a The Debt Snowball)
4. Full Emergency Fund of 3-6+ Months’ Expenses
5. Invest A Minimum of 15% Income Into Retirement Accounts (and increase savings rate to 50%+ if possible)
6. College Funding (if applicable)
7. Pay Off The Home Mortgage
8. Build Wealth, Serve, Be Ridiculously Generous And Go FI (Financial Independence)!
I’ve created a simple, easy to follow guide that you can use as your foundation as you navigate the absolute annihilation of your debt forever.


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When You Need More Help

And again, if you’re looking for some resources to get started, you can download our free budgeting forms. Also, if you’re in a place where you’re ready to kick your debt in the teeth, here's the link to our free “8 Steps To Erase Debt” guide for you to use as your foundation.
To your freedom,
This post may contain affiliate links. If you click & make a purchase, I receive a small commission (at no extra cost to you) that helps keep Zero Debt Coach up and running. Read my full disclosure policy.

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