Why an Emergency Fund Is Better Than Having Nice Things

I'll pause to let those insane numbers sink in.

So — where do we spend all of our money, plus 30% more cash that we don't even have yet? Major sources of debt for Americans include student loans, credit cards and medical bills.

Most adults understand the importance of saving for a rainy day, but in the real world, saving money isn't always easy.

Surveys routinely show that about a quarter of adults have no money tucked away for emergencies. When (not if) an emergency strikes and there isn't enough cash in savings to cover the bill, the only way to pay is with more debt.

The truth is, having an emergency fund beats the pants off buying a ton of nice things you don’t actually need — and it's an absolute necessity.

Here's the rundown:

What exactly is an emergency fund?

An emergency fund is a stash of money saved for unexpected circumstances like losing a job, dealing with an unexpected medical bill, or making unplanned home repairs.

Unlike a retirement fund, it's not necessary to set aside a huge amount for emergency savings — nor is there a set amount for everyone.

Since the money is set aside for emergencies, which hopefully don't happen often and are not considered a regular expense, the most important thing is to put aside some money regularly.

If you need help putting aside some money regularly, set up a micro-investing account that allows you to automatically invest the spare change from your everyday purchases.

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What an emergency fund can do for you

Consider the following:

• How much do you pay when your car breaks down? The average car repair cost is between $500 and $600, according to auto club AAA.

• How much have you spent for the year in repairing sudden problems with plumbing or electrical wiring in your home? The average household spends $2,000 a year for general repairs and maintenance, a Bankrate survey found.

• How much do you spend on a replacement phone when you drop yours into the toilet? An average smartphone costs $491, though you might pay $1,000 or more to replace a top-tier iPhone.

• What happens if a family member living on the opposite side of the country getting sick? Last-minute flights come at a premium.

• What would you do if your doctor prescribes medication not covered by your insurance? Stay sick or go into debt?

The answer to most of these scenarios is usually to pull out a credit card or take out a personal loan. The problem is, these can be extremely costly solutions when you have to pay them back plus interest, fees and penalties, and that's just the financial side.

Anyone who has experienced financial anxiety can attest to the fact that the only thing that's worse than not having the money is the killer stress that comes with it.

This is where an emergency fund comes in. It's your quick, hassle-free answer to moments like these. It's a safeguard against making bad financial decisions and reducing the stress that comes with large, unexpected expenses.

How much do you need to save for an emergency fund?

While there is no set amount, financial experts advise having at least enough to cover three to six months' worth of monthly expenses. The exact number depends on your own circumstances.

If you lose your job, this amount of money will allow you to cover your regular monthly bills while you look for a job.

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Remember the 1% rule

You don't have to save a huge amount of money for an emergency fund; almost any amount will do. But some major emergencies may cost more, like health care costs, housing, and vehicle repairs.

Experts suggest budgeting at least 1% of the total yearly cost of these items as part of emergency savings. If housing maintenance costs you about $2,000 a year, then tucking away $20 every month in a separate savings account can go a long way toward paying for a related emergency.

Identify items you can cut down on

Saving some extra cash for your rainy day fund doesn't have to mean short-changing yourself on the basics and completely doing away with small splurges.

When little rewards like catching a movie once in a while are taken away, the tendency to splurge on bigger luxuries goes up significantly.

Instead, saving consciously and actively for an emergency fund can start by simply cutting down on the little everyday extras that add up over time.

For example, you could cut down restaurant dinners from five nights a week to two. Bring a packed lunch to work on some days. Instead of buying a $4 coffee every day, limit this habit only to workdays or make your own at home at a significant savings.

An ounce of prevention

Sometimes we have to spend a little to save a lot. Good maintenance of your health, your kids and pets' health, your home, and your car can all prevent bad situations from occurring or worsening to the point of needing a costly solution.

When your car starts making funny noises, this can be a warning sign and reminder to see the car mechanic. Get there before a small problem gets big.

If you have a leak in your roof, the best time to fix it is now before more damage is done and you have to pay for mold removal.

Emergency vet bills for pets are pricey, so if your pet starts acting out of character, visit your primary care vet before something small turns into a medical emergency.

Take the same tack with your own health: try to form fairly healthy eating habits and get regular, moderate exercise in order to prevent expensive and painful conditions like diabetes and heart disease down the road.

Commit to not touching your emergency fund unless it's an emergency

An emergency fund should be liquid as possible, which means you want to have quick and easy access to cash when an emergency happens. This is why most people prefer setting up a separate savings account for this kind of fund.

However, it's easy to "borrow" a couple of dollars from the fund for the week's groceries and then forget to replace the money in the account after. It requires discipline to not touch your emergency savings unless absolutely necessary.

The best solution to this is to open a savings account at a different bank from your everyday accounts. Your money will still be liquid and quick to access, but it won't be as easy for you to dip into the account for everyday expenses when you can't make an instant online transfer between your accounts.

Plus, a high-yield savings account can increase your interest earnings by more than 2,000% over a standard savings account, so your emergency fund is always growing.

Emergencies can happen to anyone and they have a way of taking us by surprise. It pays to be prepared, and having some financial security in the form of an emergency fund can reduce a lot of the stress of the unpleasant surprises that life drops at our feet.