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20 Apr 2018

Do You Really Need an Emergency Fund?

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by Erin Lowell

Here are three questions to help you decide.

One of the best parts of my job as a teacher at YNAB is the interaction I get with the participants in our free, online budgeting workshops. You all ask some great questions! And, lately, one question in particular has come up again, and again: “Should I have an emergency fund category?”

I remember the days, back before I used YNAB, when I considered a car repair to be an emergency. A veterinary bill was an emergency. A lot of things that happened during the ordinary and usual course of life, if they happened more irregularly than my monthly bills? So many of them were emergencies.

I didn’t realize it then, but these were actually just true expenses—the things that we know are coming, if only we think ahead. Which is why, the more I budgeted for these things, the fewer “emergencies” I had.

So, with my newfound preparedness, did I really even need an emergency fund? Does anyone need an emergency fund?

What’s Right for You?

If you’re on the fence about whether or not to add an ‘Emergency Fund’ category to your budget, here are a few questions you can ask yourself to figure it out:

  1. What’s your cash flow situation? If it’s not great, an emergency fund can be really helpful.
  2. How dialed-in are your priorities? If you’re new to budgeting it can take a while to think of, and prepare for, all of your Rule Two expenses. The less fine-tuned your budget is, the greater your need for an emergency fund will be.
  3. Are you a risk-avoider or risk-taker? If you’re an avoider, an emergency fund category can give you peace of mind.

To make this more clear, let’s look at a couple of examples:

Marty: A brand-new budgeter, still living on the edge.

Marty’s priorities aren’t really dialed-in, yet, and his cash flow situation isn’t that great. By the time the paycheck arrives, the bank account is almost drained. Even if Marty is a risk-taker, an emergency fund category could be helpful.

As he gets more familiar with budgeting, Marty’s cash flow will improve (and he’ll get much clearer about his priorities and true expenses). At that point, he may find he doesn’t need as much in his emergency fund, or he may decide he doesn’t need it at all. His choice!

Sasha: An experienced budgeter with a lot of reserves.

Sasha’s been budgeting for a while, and her priorities are totally dialed-in. She’s got categories for all of her true expenses, and she’s got dollars sitting in each! As a result of her consistent budgeting, she’s got plenty of cash flow, too. In fact, Sasha’s so focused on checking the budget before spending, that she’s not even completely sure of the balance of her checking account (she’s not worried because she knows it’s more than enough).

As meticulous as she is with her budget, it may not surprise you to learn that Sasha doesn’t like risk, and she hates financial chaos. So, just in case, she still chooses to maintain an emergency fund category in her budget. It’s a priority for her and, though she doesn’t tap into it very often, it’s a useful learning tool.

See, whenever Sasha finds herself using her emergency funds, she asks herself, “Could I have seen this coming? Do I need a separate category for this expense?” If the answer is “yes,” she adjusts her budget, accordingly.

Are You Like Marty or Sasha (or Neither)?

If you’re still not sure whether or not you need an emergency fund, here’s a little chart for reference as you consider your decision.

How is your cash flow? Not great. Pretty good!
Are your priorities clear? I’m still learning. Nailed ’em.
Are you averse to risk? Yes. Nah.
Helpful!✅ Not essential.❌

The Choice Is Yours

It’s your money and your budget, and saving for an emergency fund is completely up to you! Consider your situation, and choose the solution that works best. And, if you have questions, feel free to drop into one of our 20-minute online classes! We’d be happy to answer them.

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