Starter Emergency Fund vs. Fully Funded Emergency Fund

If an urgent, unexpected expense of $1000 came knocking on your door, would you be able to cover it without borrowing money? 

If you answered yes, congratulations!  You are part of what I like to call the “40% Club.” That is the club built up of roughly 40% of Americans who have at least $1,000 stashed away for a rainy day.  

However, if you answered no, please know that you are not alone. In fact, around 60% of Americans are in the same boat as you. 

As a personal finance coach, it is my objective to help all of my clients join that 40% Club (and beyond) as soon as possible.  In fact, immediately after our clients have completed their Financial Snapshot and we’ve set them up with a budget, this is the very first goal we aim to reach. 

I hate to say it, guys and gals, but it is going to rain! And when it does, wouldn’t it be nice to have cash on hand as opposed to diving deeper into debt as your only way out? 

Let’s take something that could have been a major disruption to your financial health and shift it into a mere inconvenience or “bummer”  as my 7 year old would call it. 

I’m sure this concept is not foreign many of our readers.  You’ve heard of the seemingly elusive Emergency Fund before (if not, now you have!).  But did you know that there are two different types of emergency funds and they both have different purposes? 

Let’s discuss, shall we?

Starter Emergency Fund

As the name implies, this is the emergency fund that I recommend starting with if you have any sort of debt other than your mortgage.  

The most popular advice for the Starter EF is to build it up to $1,000. However, with the increasing costs of most goods and services these days, I recommend putting $1,500-$2,000 in this fund.  

This is money set aside to cover unexpected expenses that might arise while you’re paying off debt. These expenses can include anything from auto and home repairs to smaller medical expenses.  

Should you find yourself in a position where you absolutely must pull some money from your Starter Emergency Fund, fret not!  That’s what it’s there for! Just pause any extra payments you were putting towards debt and redirect them into your savings until that fund is back in that $1500-$2000 range.  

Keep in mind that the Starter EF will not cover every emergency or unforeseen need under the sun, but it will cover most! Remember, we’re high tailing our debt pay-off journey and giving every ounce of our monetary resources toward that effort so we can further build our savings as soon as possible!   

Fully Funded Emergency Fund

Let’s fast forward to the day you have paid off all your debt (aside from your mortgage) or, let’s say you’re already in that place (go you!).  It is now time to transition that Starter EF into a Fully Funded EF! 

The latter has a similar function to the former with a few caveats.  

For starters, we recommend building this fund up to 3-6 months of your living expenses.  This doesn’t necessarily mean 3-6 months of your income!  Tally up the absolute necessities in your monthly budget (rent/mortgage, groceries, transportation, and clothing), multiply that by 3, and that’s the minimum amount you’ll want to have set aside in this fund. 

Your income, job security, and other factors will determine whether or not you save more than this amount, but consider 3 months the absolute minimum.  

Also, gone are the days that car and home repairs are solid reasons to pull money from your emergency savings.  Instead, I recommend separately setting money aside for those slightly more expected costs and resolving only to pull money from your Fully Funded EF for dire situations such as job loss and major/emergency medical expenses.  

The hope is that none of these instances occur, but if they do, we want money to be the last thing you worry about. 

Here at Craig Dacy Financial Coaching, we have experts who can help you navigate the ins and outs of emergency funds on a much more personalized level.  Based on your lifestyle and needs, we can help you determine how much money to put in each of these funds and we’ll also help you set up a budget that allows wiggle room for savings.  

Be sure to set up a call with one of our money coaches today and we’ll get you moving in the right direction!