An essential guide to build an emergency fund
What is an emergency fund?
Having an emergency fund is a crucial aspect of personal finance, it is the ultimate safety net for life’s unexpected events. Say goodbye to high-interest debt and hello to a low-risk, liquid account that gives you the freedom to handle any curveballs life throws your way.
Not having an emergency fund is like driving a car without a spare tire. Sure, everything may seem fine and dandy, but the moment you get a flat tyre, you're stranded on the side of the road. Just like a spare tyre an emergency fund is there to save the day.
It’s important to note that an emergency fund is not the same as a savings account, an emergency fund is a unique savings tool specifically designed to be easily accessible and kept in a low-risk, liquid account.
Building up your emergency fund should be your first financial priority, and you can start by setting aside small amounts of money each month until you reach your goal.
How much do I need in it?
The amount you need in your fund is subjective and will depend on your individual financial situation, but as a general rule, aim to save three to six months' worth of living expenses. This way, you'll have a safety net in case of job loss, illness, or other financial emergencies.
It's important to remember that the goal of an emergency fund is to provide peace of mind and financial stability, so it's important to aim to have enough saved to cover your essential expenses if needed. Some factors that can impact the amount you may need in an emergency fund include your monthly expenses, your level of debt, and your dependents.
How do I build it?
Building an emergency fund requires a systematic and consistent approach, here are some steps you can follow:
Determine your goal: Calculate how much you need to have in your emergency fund. Again, a general rule of thumb is to aim for three to six months' worth of living expenses.
Make a budget: Identify your monthly expenses, including fixed expenses like rent or mortgage, utilities, transportation, and food, as well as discretionary spending.
Reduce expenses: Look for ways to cut back on spending so you can redirect the money to your emergency fund. This might include cutting back on subscription services or taking advantage of discounts and sales.
Automate your savings: Set up a direct deposit from your paycheck into your emergency fund account.
Stay committed: Building an emergency fund takes time and discipline, so make sure to stick to your budget and continue to redirect money towards your emergency fund regularly.
Remember, building an emergency fund is a long-term goal, so be patient and persistent. Over time, you'll see your savings grow and you'll have a safety net in place for when you need it most.
Where should I keep it?
An emergency fund can be held in a variety of places, including:
Savings account: A savings account is a common option for holding an emergency fund because it's a low-risk and liquid place to keep your money. Many banks offer savings accounts with no minimum balance requirement and no monthly fees.
High-yield savings account: A high-yield savings account is another option for holding an emergency fund. These accounts offer higher interest rates than traditional savings accounts.
Cash: Another option is keeping money on hand for emergencies, either in your home or with a trusted family member or friend. Keep in mind that cash can be stolen, lost, or destroyed.
Ultimately, the best place to hold an emergency fund depends on your personal financial situation and goals. You should consider factors such as accessibility, safety, and interest rates when choosing the right place to keep your emergency savings.
When should I use it?
You should use your emergency fund when you face unexpected expenses or financial emergencies. Examples of such events can include:
Medical expenses: Unexpected medical bills, co-pays, or deductibles can be costly and may not be covered by insurance.
Job loss or reduction in income: If you lose your job or experience a significant reduction in your income, an emergency fund can provide financial stability and help cover your living expenses.
Car or home repairs: Unexpected car or home repairs can be expensive and stressful.
Natural disasters: If your home or property is damaged by a natural disaster, your emergency fund can help pay for repairs or temporary housing.
Other unplanned expenses: Some other unexpected expenses that an emergency fund can help with include funeral expenses, legal fees, or pet bills.
It is important to only use your emergency fund for true emergencies and not for things like vacations or impulse purchases. You should also aim to build your emergency fund back up after you use it.