I recently spoke with a 30-year-old married father of two about his family’s finances. When I asked about their top financial goals, he didn’t hesitate. They wanted to save for a down payment on a home and pay off their student loans. They were also making a smart long-term decision by contributing 8% of his salary to a 401(k).
Those are all worthwhile goals.
But after reviewing the family’s monthly income, expenses, and savings, one concern became obvious. They had very little set aside for emergencies. A major car repair, an unexpected medical bill, or a temporary job loss could wipe out their savings and force them to abandon the very goals they were working so hard to achieve.
Unfortunately, their situation isn’t unique.
Keep reading if you’re interested in learning more about developing and assessing your emergency savings plan.
The financial goal that gets overlooked
Most people naturally focus on visible milestones:
- Buying a home
- Paying off debt
- Saving for retirement
- Taking a family vacation
An emergency fund doesn’t feel exciting because you hope you’ll never need it.
Yet it may be the single most important financial goal because it protects every other goal.
Without cash reserves, one unexpected expense can trigger a chain reaction of financial setbacks that lasts for years.
Emergencies are more common than you think
Unexpected expenses aren’t rare.
Cars break down. Water heaters fail. Children need emergency medical care. Employers downsize. Roofs leak. Family members become sick.
The question isn’t whether an emergency will happen.
It’s whether you’ll be financially prepared when it does.
The real cost of not having an emergency fund
When households don’t have enough cash savings, it results in increasing financial stress from living paycheck-to-paycheck, taking on revolving credit card debt, borrowing from retirement accounts, and delaying other financial goals. Emergencies become setbacks instead of temporary inconveniences.
To learn more about your real costs for not having sufficient emergency savings, and how much you should save, please download this information brief.
Where should emergency savings be kept?
An emergency fund has one primary job:
Be available immediately when life happens.
That means safety and liquidity are far more important than maximizing investment returns.
Good places to keep emergency savings include:
- High-yield savings accounts
- Money market deposit accounts
- Money market mutual funds (for investors comfortable with them)
- Short-term U.S. Treasury bills, Treasury money market funds, and Certificate of Deposits (CD’s) for a portion of larger emergency funds
Markets don’t care when your emergency occurs. If your investments lose 10% just before you need the money, you may be forced to sell at exactly the wrong time.
Emergency savings are insurance—not an investment portfolio.
How to build an emergency fund faster
Building several months of expenses may sound overwhelming, but it doesn’t happen overnight. Instead:
- Set an initial goal of saving $1,000 to $2,000.
- Automate transfers from each paycheck into a dedicated savings account.
- Save tax refunds, bonuses, or other windfalls.
- Increase automatic savings each time your income rises.
- Resist the temptation to spend the money unless it’s a true emergency.
- Replenish any funds spent from emergency savings.
Consistency matters far more than starting with a large amount.
The best investment you may never notice
The young father I spoke with wasn’t making bad financial decisions. He was saving for retirement, paying down debt, and working toward homeownership.
His only mistake was trying to build wealth without first protecting it.
An emergency fund won’t produce impressive investment returns. It won’t make headlines. It won’t be the most exciting account you own.
But when life inevitably throws you a financial curveball, it can keep you from accumulating high-interest debt, raiding your retirement accounts, or abandoning years of financial progress.
The strongest financial plans aren’t built by chasing the highest returns. They’re built by preparing for the unexpected.
Before you focus on buying a home, paying off debt, or investing more aggressively, ask yourself one question:
If an unexpected expense arrived tomorrow, would it be an inconvenience—or a financial crisis?
It Pays to Know!