May 27, 2014

The Importance of Having an Emergency Fund

29 minutes

Your future self will you for establishing an emergency fund now. It’s important to set aside emergency savings can help you get in case your home needs an urgent repair or something more serious like unemployment. We will help you figure out how much you need and how to get an emergency fund started.

Having an emergency fund is one of the most important things you can do. It’s part of adulting. Your savings should be able to cover your major expenses for three to six months.

What is an Emergency Fund?

An emergency fund is a pool of liquid money set aside for unforeseen expenses like a medical expense or a car repair. Having an emergency fund can be the difference between a small bump in your financial life and complete disaster in your entire life.

Having a robust emergency fund gives you peace of mind. No one wants to live one paycheck away from not being able to pay the rent or one car breakdown away from not being able to get to work.

It also gives you some freedom.

If you decide to leave a relationship or your job becomes so unbearable that you have to leave before finding another or you want to go back to school or start your own business, having an emergency fund gives you the freedom to do those things.

Keeping that money separate from the money you use to pay bills can help curb frivolous spending.

Sometimes when you see a big number in your checking account you get a little cocky and a little more reckless. Keeping the money separate can help you avoid temptation.

What is an Emergency?

You should only dip into your emergency fund for a real emergency; to keep yourself afloat between jobs, for a car repair, a medical expense, or a home repair. You cannot use your emergency fund for things like a vacation, a shopping spree or to upgrade your perfectly good cell phone or laptop.

An emergency is not an expected expense, like buying Christmas presents, that you didn’t budget for a few months ahead of time. That’s what a sinking fund is for.

How Much Should You Save?

Ideally, your emergency fund should be 3-6 months of expenses. That sounds like a lot and it is but keep in mind, that number can be your bare-bones expenses. If you were to lose your job your spending would be (at least it should be) different than it is when you have money consistently coming in.

The number you use to calculate your three to six months would include expenses like rent, utilities, car payments, etc. It does not have to include dinners out, entertainment, and clothing expenses or saving for retirement.

Even still, 3-6 months of basic expenses will still add up to thousands of dollars for most of us so it can be daunting to save up that much. But you don’t have to accumulate it all at once. Set a reasonable time frame to get to the six-month number. Don’t give yourself too much time though. Growing your emergency fund should be a priority.

Let’s say your ultimate goal is $12,000. That means your bare-bones expenses are $2,000 a month. If you saved $400 a month, it would take 2.5 years to reach that number. That’s a reasonable timeline as long as you are saving that $400 every month.

Remember though, this is a priority. If you can throw an extra $100 a month in there, do it. Or you can use any “extra” money you get, a bonus, a raise, monetary gifts, to help you reach your number faster.

Feeding Your Emergency Fund

Feel like you’re all tapped out and have no extra money to put towards your emergency fund right now? No fear.

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By ListenMoneyMatters.com | Andrew Fiebert and Matt Giovanisci

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