Emergencies are bound to happen. Avoiding emergencies is hard, but you can prepare for them to the best of your abilities.
Most emergencies have some type of financial impact, from breaking your arm and paying the ER fee or needing to repair your roof due to a leak. Emergencies can be emotionally and physically draining, but they can also hurt your current finances if you don't have any savings to pay for them.
An emergency fund can help prevent a financial burden on top of everything else you have to do during an emergency.
An emergency fund is exactly what it sounds like - it's an amount of money you have saved for an emergency.
It can be used for several things, from covering the cost of rent, food, and transportation if you've lost your job to cover the cost of something you were not expecting.
Typically, an emergency fund is about three to six months of your monthly expenses. If you track your spending and know your Cost of Living number, then you should know exactly how much you'll need for your fund.
Having an emergency fund is crucial to having financial security.
Most financial experts will tell you to have one, but understanding why you need one can help motivate you to save three to six months of your monthly expenses. Some reasons may be extreme, such as a medical emergency, but other reasons are so that you can feel at peace knowing you have some money set aside.
The most important reason to have an emergency fund is if you lose your job. If you don't have one, you may be unable to afford your essential monthly expenses.
In addition, having an emergency fund will be less stressful during this already stressful time. You can focus on finding a new job while knowing that your housing, food, and transportation needs are covered.
An emergency fund can also help you stay out of debt. It can be used for any reason you need to pay for something that you cannot afford with your regular budget. Of course, you shouldn't dip into your fund for all purchases, but it can assist in staying out of debt.
Emergency funds are also great to use as a rainy day fund if you have an emergency expense, repair, or medical emergency come up. These things can be costly, and it's good to know that if something happens, you can cover most or all of the expenses. However, things happen, and it's good to prepare for them.
What stops many people from starting an emergency fund is that it can be challenging to know how much you need in an emergency fund. Knowing that you need about three to six months is a start, but knowing if you need three or six months is the challenging part.
The first thing you need to know when calculating how much you need to save is to understand your current financial situation.
Next, you need to:
Doing these three things will allow you to know exactly how much you would need for a one-month emergency fund.
Next, evaluate your family status and level of risk.
Every household will be different, but there are some general rules.
If you are single or have a one-income household, it is best to save six months of expenses for an emergency fund. Should you lose your job, you are at a higher risk and do not have additional financial support.
If you have a family with two incomes, save three months of expenses towards your emergency fund. With two incomes, you have more financial support if you lose your job. The one income should be able to support your life.
You also need to decide if you have certain risks that may require you to tap into your emergency fund.
These risks can be owning a home. For example, you won't have to pay for household repairs if you rent a house. On the other hand, if you own a home, you will have to pay for all repairs and upgrades. You may want an extra month or two if you can anticipate specific emergencies that may occur one day.
Finally, plan how you will save up for your emergency fund.
You may decide to cut back on spending in certain areas and use that money towards your emergency fund. You may add this to a line of your budget until you finish building your fund.
It's essential to make sure that you replenish your fund if you use it.
Emergency funds are more than a suggestion; they are crucial if you want to have financial security.
While saving three to six months of your expenses may seem like a significant amount of money, it can help you from going into debt, paying off emergency medical expenses, or covering your household spending while you are searching for a new job.
It’s up to you how much you want your fund to be, but consider your household, income, and level of risks to determine how much to save. Then, start saving money monthly and putting it into your savings account for those rainy days.
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