This is the seventh post in the Money Girl’s Beginners Guide to Becoming Rich. To read all posts in order, start with Change your Money Mindset then continue reading the rest of the series on this page.
One important part of being financially sound is having an emergency fund. While experts have different opinions as to how much you should have in an emergency fund, almost all agree that some emergency fund is necessary.
What is an emergency fund?
An emergency fund is a cushion of savings set aside for use in the event of an emergency. Think of it as a ‘rainy day fund’ used for unexpected life events that require immediate attention such as medical bills, job loss, home repair, unexpected travel (funeral, sick relative, etc.) or unplanned pregnancy. Your emergency fund gives you security. It’s not a savings you use for non-emergency things, like upgrading your gadget or sale weekend shopping.
Note: In case of an emergency, you should use the money you have saved in your emergency fund – not a credit card or getting a loan. It’s frustrating to go into debt just to get yourself out from an emergency.
How much money should be in your emergency fund?
Most experts say you should have between 3-6 months’ worth of your household’s living expenses in an emergency fund. Your emergency fund is meant to help you get by for awhile no matter how big or small the emergency is. Factors that can help you determine how much you should save include: 1) the security of your job, 2) the number of breadwinners in your household, 3) your personal family needs, and 4) what makes your feel secure. How much you need in your emergency fund is a personal choice that you need to make based on your specific situation.
For example, if you have multiple income streams that are very secure, you may find three months is enough. Alternatively, if your job/business is not very predictable and it is your only income stream, you may want to save eight months to one year of expenses in your emergency fund.
Where should you keep your emergency fund?
Most financial experts recommend that your emergency be highly liquid and be readily accessible in 2 to 3 days. Usually, this means in a savings bank account (where you can access it quickly and easily). Remember, the emergency fund MUST BE SEPARATED from the rest of your money. Place it on a NO-TOUCHIE Zone. While the money in your emergency fund is not going to grow like it would if it were invested, that is okay. The point of your emergency fund is not to build wealth; rather it is to have money that is easily accessible in case of an emergency.
How do I start saving for an emergency fund?
To start saving for an emergency fund, figure out how much you need to save by multiplying your expenses by however many months you want to save for and then create a plan to save for that amount. In saving up for your emergency fund, you’ll also need to have the willpower and discipline to do so. Although, sometimes people have difficulty in this aspect, so the best way is to Automate Your Savings.
Related Post: Find Money To Pay Debt and Increase Savings
Note: Treat savings as an expense just like your utility bill so that you’d be force to set aside an amount for it.
Remember that emergencies happen to all of us. Not being financially ready for a rainy day is no one else’s fault but your own.
Take control of your financial life and get a solid financial cushion underneath you.