How Healthy is Your Emergency Fund?

If your dog needed a splenectomy in the middle of the night, would you have enough money set aside to cover the cost (hint: pet insurance rocks!)?

If you needed a new set of tires on your car, would you be able to pay for them on the spot?

If your furnace or your A/C died, would you have enough savings to pay for the repairs – or a replacement?

Murphy’s Law happens. Unexpected expenses can drain your bank account if you don’t plan well. A rainy day fund, aka an emergency fund, can save you from needing to hit the panic button, or to pay with plastic.

Setting aside some savings can leave you less vulnerable to emergency situations.

If you’re in debt, your savings will prevent you from sinking deeper into debt by overcharging your credit card or borrowing money to cover emergencies. Even if you have no debt, an emergency fund is essential to safeguard you from accumulating debt in the future.

If you have dependents (including pets), the often cited $1,000 minimum emergency fund is probably not enough. A starter emergency fund of $3,000 to $5,000 will give you more of a financial cushion to cover medical expenses or pet ER bills. This amount is a good start if you have consumer debt, such as credit cards or car loans.

The next step to have a true emergency fund is to set aside 3-6 months of expenses. Add up your expenses over a quarter to determine how much you spend in an average month. This financial goal will likely take several months to achieve. But that’s OK. The important part is to start and get it done.

If you have student debt, the amount you should save depends on your repayment method and goals. If your goal is to use accelerated repayment to pay off your student debt early, a starter emergency fund of $3,000-5,000 is appropriate. Once you have paid off your student debt completely, go to the next level and save 3-6 months of expenses.

If you’re using an income-driven repayment plan such as PAYE, REPAYE, or IBR, you will have more cash flow each month for other financial goals. Saving up 3-6 months of expenses as an emergency fund should be a goal in addition to saving for the “tax bomb” that you will owe the IRS in 20-25 years when the debt is forgiven. An emergency fund will serve as a buffer to prevent you from spending the money you have set aside for the “tax bomb.”

Your emergency fund should be in an account that is easy to access, such as a regular savings account. If you choose to use a higher interest savings account, make sure that you can easily access the funds at any time, including nights and weekends, since by definition, emergencies can happen any time. 

If you don’t have an emergency fund, it’s OK to start small. Set a reasonable goal and automate your savings so that money is moved automatically from your checking account into a savings account each month.

The peace of mind you will have when you reach your goal is priceless.

Phil Zeltzman, DVM, DACVS
Meredith Jones, DVM
Co-Founders of Veterinary Financial Summit