What’s an Urgent Fund and Why You Need One

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Does it seem like unexpected expenses always come up? Do you struggle with how to handle them when they do? Do you feel bad when you dip into your savings to cover them? Does it seem like you can’t gain traction with your financial goals because you’re always addressing expenses that “pop up”?

If you answered yes, yes, yes, and yes, the solution to your problem may be to establish an “urgent fund.”

What is an Urgent Fund?

You are probably familiar with the emergency fund — that oh-so-important stash of cash that when in place can cover emergencies without you going (further) into debt, relying on friends or relatives, or dipping into your retirement funds.

Well, I have found both from my own experience and in working with coaching clients, that often, unplanned expenses pop up that tend to live in a grey area between emergency and routine expense. They’re not necessarily a matter of survival, but they do need to be addressed timely. Waiting on taking care of these expenses could make them worse or more costly.

When you dip into your emergency fund to cover these expenses, it doesn’t “feel right,” because they’re not quite emergencies. But ignoring them isn’t an option. The best way to describe these expenses is “urgent.” And to deal with them, I’ve created the idea of the urgent fund.

An urgent fund is cash set aside specifically for unplanned expenses that are “urgent.”

I see it almost as the top layer of an emergency fund or an emergency fund for your emergency fund. When it’s in place, you can utilize it without fear of depleting your emergency fund to cover expenses that aren’t emergencies.

When and How to Establish an Urgent Fund

So at what point in your financial plan do you establish this fund, and where do you get the money to do it?

Since the urgent fund is a layer of protection for your emergency fund, a good time to save for it is after you’ve established a beginner emergency fund of $1,000 or so, or after you’ve established a fully-funded emergency fund of three to six months of expenses.

Funding it can be done in much the same way as your emergency fund. A few ideas to save up for your urgent fund include:

• Do a one-month Money Fast
• Eliminate or reduce a specific expense temporarily
• Hold a yard-sale
• Sell unwanted items online
• Shave off a dollar amount off one of your budget categories
• Pick up a temporary or part-time job, or develop a side hustle
• Dedicate earnings from cash-back apps and cash-back sites like SavingStar, ibotta, Swagbucks, and Ebates
• Dedicate a portion of any unexpected money received (e.g., birthday gift, bonus, tax refund, etc.)

The idea is to save it up as quickly as you can. You could save it in the same account as your emergency fund, provided it’s not in your checking account. If you bank with an online bank such as Capital One 360, you can quickly create a new account specifically for your urgent fund.

Related Reading
•   Why You Need A Beginner Emergency Fund
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How Much Goes Into the Urgent Fund?

Since the urgent fund is established after you have either a beginner emergency fund or a fully-funded emergency fund in place, a good way to approach how much to put in it is to make it a specific percentage of your emergency fund.

I suggest a range of 10% to 25% of your emergency fund. So if you have a $1,000 beginner emergency fund, your urgent fund could be $100 to $250. A $10,000 emergency fund would mean a $1,000 to $2,500 urgent fund. And a $15,000 emergency fund would mean a $1,500 to $3,750 urgent fund.

Figure out the range in your case and see if that number feels right. You can always save less or more.

If you’re paying off debt, the urgent fund should be large enough to cover the occasional unexpected expenses, but not so large that it delays your ability to pay off your debt.

What Expenses Does An Urgent Fund Cover?

Since “urgent” expenses fall in a grey area, what qualifies as urgent is unique to your situation.

When something comes up, ask yourself these questions to determine if you should dip into the fund:

• Can I live without this expense?
• Can this expense wait until I can put it in the budget?
• If I delay this expense, will it potentially get worse or cost more when I finally address it?
• Is this expense related to someone’s or something’s well-being?

Some examples of expenses an urgent fund can cover are:

• Car repair or maintenance
• Co-pay and medicine for sick visits
• Childcare for an unplanned event
• Trip to the vet
• Replacing a cell phone
• Kid-related expenses
• Minor home repair or appliance replacement

Ideally, your budget covers things like routine car maintenance or home maintenance, but if you are squeezing every penny to pay off debt, you just make not be at the point where your budget covers everything. Since those expenses are urgent, they can be handled with the urgent fund.

As much as possible, your first line of defense when dealing with unplanned expenses is to go to your budget. Before dipping into the urgent fund, see if the expense can be handled by moving things around, reducing, eliminating, or delaying some items — the same way you would before using your emergency fund.

Let the Urgent Fund Work for You

There are no hard and fast rules to establishing an urgent fund. Again, choose what makes sense for your situation.

The urgent fund is just another layer of protection to help you sleep at night. The idea is not to never touch your emergency fund, but rather to have a system in place so that your emergency fund can handle legitimate emergencies. It will allow you to address the things that come up without feeling like you’re taking steps backward or are taking a long time to meet your goals.

Having an urgent fund can make you feel more in control and on top of things. If you currently feel like you aren’t gaining traction in meeting your financial goals or it seems like every month something comes up, establishing an urgent fund can give you a greater sense of peace in your finances.

Related Reading
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What do you think of the idea of an urgent fund? Could you benefit from establishing one? What expenses would you let yours cover?