What Is an Emergency Fund (and Why Should You Teach Your Kids & Parents About Them)?

While you were working and raising a family, you might have had an emergency fund that enabled you to weather unforeseen financial storms that came your way. 

To truly enjoy retirement and continue living in financial independence, you need the same kind of cash reserves. Unfortunately, far too many Americans aren’t prepared for unforeseen financial distress. One recent study, for example, found that just 40 percent of Americans can cover an unexpected $1,000 expense.

If the bulk of your money is tied up in investments and retirement accounts, covering such an expense might not be a walk in the park for you, either. That’s why it’s so important to make sure you don’t invest all of your money.

In addition to building up your own emergency fund, you also need to teach your kids the importance of doing the same. After all, you likely don’t want your loved ones to find themselves in a pinch when something unpredictable happens. By encouraging them to create their own emergency funds, you may help your kids get into a position to absorb these unforeseen costs—and enjoy the peace of mind that comes with that ability.

Keep reading to learn more about what an emergency fund is, why you and your kids need one, how to build one, and how to teach your kids to do the same.

What Is an Emergency Fund?

An emergency fund—you guessed it—is a stockpile of money set aside for a rainy day. 

If you incur unbudgeted medical expenses, experience car troubles, or need to make unexpected home repairs, an emergency fund is standing by and ready to help. 

Despite the benefits that come with emergency funds, 49 percent of Americans don’t have enough cash to cover a $400 emergency, according to a YouGov survey conducted in May 2022.

What Is the Purpose of an Emergency Fund?

There are many reasons you and your kids can benefit from having your own emergency funds. For starters, when you have an emergency fund, you’re able to cover any expenses that might come your way, making your retirement that much smoother. 

At the same time, you probably don’t want your kids turning to you when unexpected bills pop up; it’s not a sign of strong financial discipline, which could lead to financial difficulties in the future. An emergency fund is a foundation that may help prevent your kids from remaining financially dependent on you. 

Additionally, it gives them the calming reassurance that comes with knowing they can cover expenses that might pop up at any time. Emergency funds may help ensure that your kids can pay their bills in the event that they lose their jobs or are otherwise out of work (e.g., as a seasonal contractor). It might also help them cover unplanned expenses—such as when the car unexpectedly breaks down. 

An emergency fund can also be used to buy their favorite things. For example, maybe your kid wants to buy a hot tech item such as a new phone. They could tap into their emergency fund to do so—and then replenish it at their earliest convenience.

As an added bonus, wouldn’t you feel more confident and able to enjoy your retirement knowing that your children have their own emergency fund, especially because you won’t always be on hand to give them money?

How to Start Building an Emergency Fund

At this point, you’re probably sold on the idea of making sure you and your kids have your own emergency funds to tap into as needed. But you might be wondering how, specifically, said funds can be created.

Creating an emergency fund may start with reducing expenses. Maybe you or your children have a penchant for eating out several times a week, for example. By deciding to eat at home more often, you might be able to save a few hundred bucks each month—and that money can be used to seed your emergency funds.

You and your kids may be able to identify additional areas for savings by examining your credit card bills in full each month. For example, although subscriptions to services such as Netflix and Spotify might seem like they’re only a few bucks, those costs can add up significantly. You and your kids might even find out that you’re still paying for a gym membership even though you haven’t stepped foot inside the facility in years!

Lifestyle changes can also help you and your kids save money to start an emergency fund. Let’s say your loved ones are keen on paying for an Uber ride every time they go anywhere. Switching to public transportation, in this example, can help them save a substantial amount of money.

Once you and your kids begin to stockpile emergency funds, it’s important to do what you can to ensure you get the biggest return on your cash. In today’s era of rising interest rates, it’s smarter to park your emergency fund in a money market account or a high-yield savings account where you will be able to generate more interest compared to a traditional savings account. That way, your emergency fund will get larger and larger over time, and your money will remain liquid instead of tied up (e.g., in a CD account).

Ready to Build an Emergency Fund—and Help Your Kids Do the Same?

Emergency funds may give people of all ages who live all over the world a more comfortable life—but you might already know this because you’ve had an emergency fund of your own for years.

Wouldn’t you feel more comfortable knowing your own emergency fund is intact during retirement? Wouldn’t teaching your kids to build funds of their own help reduce your worries so you don’t have to be their piggy bank? The sooner you start teaching your kids about the importance of coming up with a spending plan and sticking to it, the earlier they’ll be able to start creating their own emergency fund.

Truth be told, none of this will happen overnight. But with enough discipline and some encouragement, you can go a long way toward helping your loved ones secure their own financial futures—which may help you do the same.

Looking for more tips on securing a financial future for your loved ones? Want to talk through your retirement finances? EP Wealth may be able to help. Contact an advisor today.

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