Emergency fund: what you need, whether you are 20 or 80

Why You Need An Emergency Fund


emergency fund, savings, borrowing, student debt,

An emergency fund is freedom.  Money is freedom.   Money on hand gives you choices.  Having a job that pays well is great but financial freedom is more about the money you keep than the money you earn.  Some people become financially independent on a modest salary while some are always broke on a much bigger income.

Financial freedom means to never have to borrow money for emergencies, like the roof leaking, or the fridge breaking down or to go on holidays or for birthday or Christmas gifts.  Financial freedom means to know you have a financial cushion should life throw you a curve.

As a woman, I feel very strongly that all women should have some money to their name, and yes, savings and an emergency fund, even if you are married to a millionaire.

I was well past 20, even 30 when I first heard the term “emergency fund”. Luckily I had never needed one before, so there was no damage.  In my 20’s I was totally oblivious to saving money.   Later, although I always made sure I  had a few hundred dollars in my  checking account, I don’t remember being a systematic saver.  I really started thinking about savings and emergency fund and retirement savings when I found myself alone with two young children.  And I am so glad I did.  Only wish I had started earlier.

I have met, worked with and known many 20, 30, 40 and even 50 year olds who either had not heard about such a fund or had simply not bothered to put one in place, at great cost to them.  People who often make good money but lived paycheck to paycheck, often carrying large a large balance on their credit cards.

The saddest case was a woman 63 years old , married.  Both her and her husband worked, with an annual income of close to $90,000.  When I met her, they  were 3 years post bankruptcy.  Her husband had recently become ill and could only bring in less than $20,000 a year, so she had to work full time, combining two fairly demanding jobs and being stressed knowing she could not work less or retire like she wanted.

The bottom line for her was  that there was no way she could retire until at least 65 because there was no money put aside.  She continued to work but fell ill and died of cancer two months short of her 65th birthday.  I cannot but think that the stress at the end of her life was a factor in her illness.

In my days working as a Financial Planner, I also encountered high income families,  saddled with over $100,000 consumer debt, and as you guess, no savings.

Emergency Fund at 20

If you are 20, you don’t need an emergency fund as big as the 35 year old who just bought a house or the mom who is recently separated and responsible for little ones.  But as you will see from the example below, you will need more than a few hundred dollars and the best time to build an emergency fund is when you don’t need to.  Just like buying insurance when all is good, not when the house is on fire.

So how much of an emergency fund should you have and how soon should you build one?

I say as soon as you get your first time job.  In fact, if you have a pretty good part-time job while in school or University, I suggest you start then.  You have nothing to lose by having more money in your bank account.  If you are one of those lucky ones, imagine the freedom from having money in the bank even before finishing school.

Let’s imagine you are fresh out of college or University, you have student loans,  you live at home and are looking for the first job.  Student “A” has managed to stash $2,000 away.  Student “B” has no money whatsoever.  I am certain student “A” will be less stressed, will be able to afford some work clothes if need be, as well as cover the expenses related to job search, like transportation, without having to ask mom and dad to pitch in.

Having the security of a fund wil allow Student “A” to be able to make larger student debt payments, getting rid of the debt sooner – and saving on interests.

If you have not been able to build an emergency fund before the first job after college (hopefully a full-time one with full time salary), the next best time to start is the day you receive your first paycheck.

How much should you save?  That depends what your income is and what your goals are.  If you have the benefit of living at home either rent-free or with a small rent, I would suggest you put half your net salary in savings, until you have enough money for first and last month’s rent on a place of your own, plus 3 month’s rent and living expenses once you are on your own, as well as 3 month’s student loan payments.

If you look at a rent of $800 a month, that comes to $4,000 for rent plus 3 months of enough money to cover food, insurance, transportation, and some money to go out once in a while.  A very conservative estimate is about $1,000 plus the student loan payments for 3 months, however much that is.

The above example comes to at least $5,000 fund – the 3 month’s extra is in case you lose your job and it takes you even 2 months to find another one (and you don’t get paid for at least 2, sometimes 3 or 4 weeks when you start a new job).

As you can see, even at 20 or so, you need some serious money in your piggy bank.

Emergency Fund at 30 (or as soon as you have more responsibilities)

Now let’s imagine you are 35.  You were married but now find yourself divorced, without financial support.  You have 2 children for whom you are totally responsible.  You make a good salary, around $75,000, your rent will be $1,200. You don’t have student debt (hopefully) but you bought a car and have payments of $350 a month.   What should your emergency fund look like?

Rent X 7 months $7, 200.  Food and other expenses for 5 months, including the car payment: $6,000 – Total: $13,000 +  Why 5 months of extra expenses?  Because as a single 20 year old, you probably could move back with mom and dad or rent a room off a friend should need be – but as a parent with 2 dependents, you just can’t up and move in with a friend.  So 5 months of living expenses is a minimum.  6 months would be even better, because the fridge could break down or the stove, or you could need new tires.

A $12,000 to $15,000 emergency fund looks huge but if you do the math with your numbers – salary, rent or mortgage, insurance, car loans, etc, you will most likely come without a few hundred dollars of this estimate.

Emergency Fund at 40, 50, 60

Let’s say now, you are 40, 50, or 60 and you own your home.  It’s a $350,000 home.  Just off the bat you should put away at least 1% of the value of the home every year, until you have a fund of at least $10,000, or even better, aim for $15,000  A roof alone can take you back $8,000.  It does not mean you will spend $3,500 every year but over a 10 year span, home maintenance will average $3,500 a year.  I know from experience that work on the foundation of a small house can easily cost over $10,000.

Windows, doors, also need upgrading at some point.  Even without renovating, the deck may need replacing,  The furnace can break down.  Owning a home costs money.  Trust me, you will be glad if you don’t have to borrow money to maintain your home.

Of course this emergency fund is on top of the one you built in the previous stage, to cover your other living expenses should you lose your job.

Many homeowners skip the emergency fund and re-mortgage their house every 5 years or so, increasing their mortgage by $5,000, $10,000, $25,000 or more every time.  It’s easy to fool ourselves because those “small” additions don’t increase the payments by much but the bottom line is that the mortage never goes down

Saving money is not always fun but everything being equal, it’s a lot more fun than having to borrow money and add interests to the mix.  It’s a lot better than worrying about finding the money, or qualifying for a loan and then tightening your belt because you have more monthly expenses.

Emergency Fund at 70, 80 and beyond

What about if you are older?  Do you still need an emergency fund?  Yessss you do.  Unexpected expenses happen at all ages.  Even if you are retired, you can still have big unexpected expenses.  Car breakdown, medical emergency requiring home care, unplanned  travel expenses to attend weddings or funerals in the family, appliances breakdown, and yes, your funeral expenses which you don’t want to saddle your children with.

Don’t get discouraged when you see those big numbers.  The sooner and the most you stash away every week, the smaller it will become.  Yes it will take discipline to do so and you will most likely have to adjust your lifestyle.  Think abou the prize at the end.

I hope I have convinced you that it’s better to save now and sleep soundly knowing you have a nice nest egg should you need it.  Taking care of our money is a way to practice self-care.  Money worries are bad for your health and your relationship.


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