Having an Emergency Fund is an absolutely essential thing to have as the backbone of your financial security! The thing about life is that nobody can see the future, and having some kind of financial cushion in the event that something does happen is very important!
Any financial guru or self-help book advocates for having an emergency fund in place. So let’s take a look at why this is important and how to build one.
- What exactly is an Emergency Fund?
- How much should you save for an emergency fund?
- Why do you need an emergency fund?
- Where should you keep your emergency fund?
- How to get started building an emergency fund
What exactly is an Emergency Fund?
This is basically money set aside in the case of something bad happening and needing cash in an Emergency. Any money saved as an Emergency Fund is not used to buy things such as vacations or cars. Instead, you set it aside and never touch it until the day an emergency occurs.
An example of an emergency would be if you had a car accident and you need to pay the deductible on your car insurance. Or if you come down with an illness and have to pay for an E.R visit.
As much as these examples are extreme, you should also treat your emergency fund as something you never touch unless it’s an extreme circumstance. Everyone hopes that they never experience extreme circumstances, but emergencies are never expected!
How much should you save for an emergency fund?
There are many opinions on how much one should have saved aside for emergencies, but generally, financial experts like Dave Ramsey always seem to agree that you should have 3 to 6 months of living expenses set aside as an emergency fund.
If you’re just getting started, start off with $1,000 as quickly as possible. This is the bare minimum threshold that an emergency fund should be at.
Once the $1,000 starting threshold is met, then slowly but surely build up to having an emergency fund of 3 to 6 months of living expenses. This will take time and dedication, but definitely doable.
Why do you need an emergency fund?
Just as the name suggests, it’s used in the case of Emergencies. The thing about emergencies is that you never know when they are going to happen so it’s always good to remain prepared!
Let’s take a look at a few reasons why it’s absolutely important that you have one.
1. In case you lose your job
While its common to assume that your job is secure and everlasting, there are millions of cases out there of people losing their jobs. It’s not only because you may be underperforming, but the company you work for might be going out of business or even downsizing. In the event that you lose your job, and you have $0 emergency fund, things can get from based to worse very quickly.
2. For medical emergencies
Another MAJOR reason for having an emergency fund is in the case of medical emergencies. Accidents happen, and it’s impossible to predict when you’re going to get sick next time. A new study from academic researchers found that 66.5 percent of all bankruptcies were tied to medical issues —either because of high costs for care or time out of work. So its imperative that you have a healthy emergency fund set aside.
3. Asset emergencies
Ever had your Central Heating unit break down during a freezing winter? Or maybe you had a car accident and that’s your only car but it also needs repairs? These things happen more often than people would like to admit. Because of this, an emergency fund can help fix issues as they arise promptly.
Where should you keep your emergency fund?
Very important things to remember about emergency funds are:
- It should be easily accessible in the form of cash
- It should NOT be kept under your mattress where it can be stolen easily
- It should not be mixed with your day to day checking account
- Only touch it in the case of emergencies
Now since we cleared that up, where you keep your emergency fund is entirely up to you. However, there are a couple of recommendations of where you should consider keeping it.
I personally use Betterment to keep my emergency savings. Reason being I’ve used their services for years now, and you can allocate up to 100% of your contributions to Bonds so your savings also appreciate over time! You should check them out.
How to get started building an emergency fund
1. Set a budget
Setting a budget allows you to have money left over to contribute to your emergency fund. Without a budget, it’s hard to live within your means, and in turn, makes it very hard to save any money at all. Create a budget and stick to it!
2. Set a goal
The second step is to set a goal. By setting a goal, you know what you’re working towards. You should set two distinct goals:
- Every month I’ll save $____ towards my emergency fund
- I’ll have $1,000 in my emergency fund by _________
All you have to do is remain dedicated and consistent and these goals are easily attainable. Always revisit them and make sure you’re still on track and adjust them when necessary (like an increase in income).
3. Make adjustments
As time goes on, your budget and savings rate will change from time to time. Either from a change in your income or an improvement on what you spend your money on. Your budget and emergency savings goals will need to be periodically revisited to make sure that you’re still on track!
Like it? Pin it!