How Does an Emergency Fund Work? And Other Emergency Fund Questions & Answers

If you’ve heard or read much financial advice, you’ve probably come across recommendations to establish an emergency fund. As far as advice goes, it’s pretty widely accepted—and for good reason. An emergency fund can be an extremely valuable asset.

But what is it, and how does an emergency fund work? How much should you set aside? 

For such a popular concept, there are a lot of questions you can struggle to find answers to. That’s why we’re here. This guide from Lightning Money Loans answers your emergency fund questions so you can approach the topic with confidence.

Emergency Funds: The Basics

It’s very simple: An emergency fund is money set aside for unexpected expenses. 

We can’t prepare for every bill that comes our way. Sometimes the car breaks down and we need a tow truck, the kid breaks an arm, or extreme temperatures lead to an abnormally high utility bill. Maybe you get unexpectedly caught in layoffs or are a victim of restructuring. That sort of loss of income can move your weekly grocery trip into emergency territory while you look for a new job.

An emergency fund lets you weather these ups and downs. It enables you to handle the unexpected bills with money from your emergency fund and then build it back up once conditions return to normal.

You might need to put some work into earning extra money until your emergency fund is where you want it, but doing it over time beats the pressure of needing money right away for the unexpected.

FAQ: Answering All Your Emergency Fund Questions

How Much Money Should You Have in an Emergency Fund?

There’s not necessarily a one-size-fits-all solution for this question. Each person’s financial needs and ability to adjust to unexpected expenses differ. But for most people, it’s a good idea to start by saving $1,000, an amount that will cover most minor emergencies and allow you to have options when unexpected expenses hit. 

Eventually, aim to set aside 3–6 months of your average monthly expenses. That might sound like a daunting task, especially if you don’t have much to spare each month, but it will put you in a sound financial situation, especially in the case of an unexpected layoff or major emergency.

What If I Don’t Have an Emergency Fund?

We’re not trying to be alarmist, but the truth is that emergencies happen to everyone. Unexpected expenses are part of life. 

So, what happens if you don’t have an emergency fund and an emergency hits? Your options are limited. A lot of people end up going into debt—they find a place to get a loan, borrow money from a friend or family member, use a credit card, or take a similar action. A personal loan can be a helpful option in certain circumstances, but it’s not great to make financial decisions because you have no other choices. 

You might be able to work in a side hustle or sell some of your possessions to raise the money you need, but emergencies tend to be urgent. You may not have time to pursue these opportunities if you need the money now. It can even be difficult to find an instant loan, though options do exist.

If you have an emergency fund, all you need to do is transfer some money and pay for the unexpected expenses. It’s that simple. You won’t need to act out of desperation. Just take the money you need and then work on building your emergency fund up again.

What Is the Rule for Emergency Funds?

This is your money, so no one has the right to establish any rules except you. However, we strongly recommend sticking to the guideline that this money is exclusively for emergencies. It can be tempting to dip into your emergency fund when you see a hot deal on something you really want or to help cover a much-needed vacation, but try to curb those impulses and focus on your financial safety net.

Once you break the rule, it becomes even easier to do it next time. And if you want this money to be available when you genuinely need it, you’re going to need to leave it alone.

Where Should I Keep My Emergency Fund?

Any secure spot where your money can accumulate works. We recommend opening up a separate savings account at your current bank or even another one. An alternate financial institution is a good option because if it’s out of sight, you might feel less tempted to dip into the fund for non-emergencies. 

However, where you keep the fund also depends on availability. You need to be able to access this money without delay when you need it, so avoid getting into a situation where it takes days to transfer to your checking account. 

If an account meets your other requirements, it’s also worth looking at whether it offers a decent interest rate. Since genuine emergencies will hopefully be rare, you might as well earn a return on your emergency fund!

Submit a Loan Request Through Lightning Money Loans

An emergency fund is a great financial resource that can save you a great deal of stress when the unexpected happens. Don’t hesitate to pursue any financial strategy or product that can put you in a better situation. 

If a loan could be useful, Lightning Money Loans works with a variety of online and storefront lenders to connect people like you with loan opportunities and financial resources. Submit your loan request today, and we’ll send your information to our network. It only takes a few minutes to fill out the form and get connected with a lender or other resources.