Please ensure Javascript is enabled for purposes of website accessibility

Why an Emergency Fund Should Be a Top Financial Priority

By Christy Bieber – Oct 6, 2017 at 5:48PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Why should you prioritize an emergency fund? Find out why saving for an emergency fund needs to be one of your top financial goals.

If you're like most Americans, you have lots of demands on your money. You may have student loans to pay, a down payment to save for, and high interest debt you're trying to pay off.  Prioritizing all of your different financial goals can be difficult, but one of the very first goals to achieve is saving at least some money for an emergency fund. 

Around 60% of Americans have less than $500 available for an emergency, despite the fact emergencies happen all the time. Nearly as many Americans -- 45% -- had incurred a major unexpected expense over the prior year, according to a Bankrate survey.  

While your ultimate goal should be to have at least three to six months of living expenses in an emergency fund, you don't have to start with an aspiration that's this hard to achieve if you're in debt or have other money troubles. You should, however, make it a point to save at least $1,000 as one of your first financial accomplishments -- even prioritizing emergency savings over aggressive debt repayment. 

Glass jars filled with coins

Image Source: Getty Images.

Why fund an emergency fund as a top priority 

If you're in debt, it's tempting to want to allocate all of your extra cash to paying it off as fast as possible. Setting aside money for an emergency fund can seem like a foolish waste if you're paying high interest costs on money you owe. However, despite the fact it may seem like bad math, you should begin saving cash for an emergency even while you are still in the red and have credit cards or other debts to pay. 

One of the biggest reasons to save for an emergency is that emergencies will happen. It's inevitable that cars or household appliances will break down, children will get sick, or other unavoidable expenses will crop up. If you don't have an emergency fund when these expenditures arise, you'll have no choice but to go further into debt to handle the unexpected expense. This continues the cycle of debt that you're in and can be demoralizing if you're trying to repay what you owe. Seeing your progress on debt repayments eroded by having to make new charges on your credit cards can kill your momentum and make it that much harder to be aggressive about early debt payoff. 

Saving for an emergency also ensures you will actually have cash available when you really need it. If you're in debt already, you may be unable to access affordable forms of credit if an emergency arises. When your emergency requires quick cash you don't have, you could be left with no choice but to take a credit card cash advance, a title loan or a payday loan. Any of these options come with very high interest rates and should be avoided at all costs. If you've saved money for an emergency fund before getting aggressive about repaying debt, you'll have the money available to you without having to take on very costly debt that will be much harder to repay later.  

Finally, starting your emergency fund is a good way to get into the habit of saving and to change your money mindset. You can use your efforts to save for your emergency fund to start the practice of paying yourself first. Make saving for emergencies a line item on your budget and have the money taken out of your paychecks before you ever see the cash. You'll get used to living on a little less -- and once your emergency fund has been funded, you can reallocate this money to other financial goals, like debt repayment or saving for things like that dream home you've been hoping to buy. The power of building an emergency fund can give you more of a feel of control over your entire financial life, which can keep you motivated for making smart money moves going forward. 

Christy Bieber has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Bankrate, Inc. Stock Quote
Bankrate, Inc.
RATE

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
326%
 
S&P 500 Returns
102%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 10/02/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.