Are you trying to find a good guide that will teach you how to build an emergency fund, needing an emergency fund calculator, along with a clear explanation as to why you need one? Are you finding articles that sound complicated and intimidating? You’re in luck, having reached a 6-figure net worth by the age of 25, I am sharing with you what I’ve learned along the way.
Everyone has experienced (or will experience) unexpected emergencies financially. It’s just a part of life. Whether it’s because of huge medical bills, a car crash, lost job, etc, it can be very stressful. Without proper preparation, these types of situations can sink you financially.
By setting up an emergency fund, you will be better protected from these types of financial emergencies. This is one of the foundations of financial health, and you will be empowered by having one. By putting aside even just small amounts each month, you’ll be able to quickly build one up.
This article will answer all of your questions around what an emergency fund is, why you need it, how much do you need, and more! My hope is that you will leave feeling well-equipped to start building this hugely important fund for yourself. So let’s get started!
This post is all about Emergency funds
Building an Emergency Fund: Everything you Need to Know
What is an Emergency Fund?
A savings account designated especially to handle unforeseen costs or financial emergencies is known as an emergency fund. It is money you have saved up that is not intended for any specific use and is instead accessible to help you pay for unforeseen expenses like a job loss, unanticipated medical expenses, auto repairs, or home repairs.
When unexpected expenses occur, having an emergency fund on hand can prevent you from going into debt or experiencing other financial hardships. Generally speaking, financial professionals advise having three to six months’ worth of living costs set aside in an emergency fund. Your unique situation, such as your monthly expenditures, and income stability, will determine the precise amount that you should set aside.
Why do you need an Emergency Fund?
There are several factors that make an emergency reserve crucial:
- Unexpected costs: Because life is unpredictable, unplanned costs, like a medical emergency or a vehicle breakdown, can occur at any moment. Without an emergency fund, you might have to use credit cards or borrow money to pay for these costs, which can result in debt and other financial strain.
- Job loss: If you don’t have any savings to fall back on, losing a job can be a significant financial setback. While you look for work, an emergency fund can assist you with living expenses.
- Having a financial safety net can give you piece of mind and lessen the stress you experience every day. You may be able to better concentrate on your job, family, and interests as a result.
- Keeping out of debt: If you don’t have an emergency fund, you might have to use credit cards or loans to pay for unforeseen costs. This can result in exorbitant interest rates and long-term debt.
Overall, having an emergency fund can help you reduce financial stress and keep your financial stability in the face of unforeseen events. It is an essential component of financial planning.
How Much do You Need in Your Fund?
Your unique situation, including your monthly expenses, the stability of your income, and any possible risks or uncertainties in your life, will determine how much money you need in your emergency fund.
The majority of financial professionals generally advise having three to six months’ worth of living costs set aside in your emergency fund. In order to calculate how much you should have in your emergency fund, add up all of your monthly expenditures, including rent or mortgage, utilities, groceries, and other bills, and multiply the total by three to six.
You might be able to save less than three months’ worth of living expenses if you have a steady income and little chance of losing your work or facing other financial uncertainties. On the other hand, you might want to save more than six months’ worth of living expenses if you face a significant risk of losing your job or other financial risks.
Your emergency fund should, in the end, give you a feeling of security and financial stability in the event of unforeseen circumstances.
How to Build an Emergency Fund:
Although it can be difficult, setting up an emergency fund is crucial for sound financial preparation. The following actions can help you create your base:
Set a Goal
Calculate the amount you need to save to create an emergency fund. As previously stated, the majority of financial professionals advise saving three to six months’ worth of living expenses.
Make it SMART : Specific, Measurable, Achievable, Realistic, and Time-bound. Keep track of how your goal meets each of these criteria. Write down your goal, and when you will achieve it by.
Make a Plan
Make a spending plan that accounts for your revenue and expenses. You can use this to determine where you can reduce your expenditures and put more money toward your emergency fund.
Determine how much you need to save each week/month or whatever time-chunk works best for you. Breaking it down into steps will help you to achieve your goal in the amount of time you want. Answer HOW you’ll do it.
Make it Automatic
Set up monthly automatic payments from your checking account to your emergency fund to automate your savings. You can save regularly as a result of this without having to think about it.
If you can’t find a way to do this with your bank account, you can have a payday ritual, where you automatically save the amount necessary each time you get paid.
Take Advantage of Income Boosts
Occasionally you’ll see random income that can be tempting to spend. Like when you get a bonus. Take advantage of these income boosts to put extra aside to work towards your goal.
Increase your revenue by finding additional sources of income, such as side jobs or freelancing. This additional money can be put toward your emergency fund.
Where To Keep Your Fund:
When you are trying to figure out where to keep your emergency fund, you need to find a balance between accessibility/liquidity and potentially earning potential. Knowing that, here are a few options for you to consider:
- High-yield savings account: Because it’s simple to access in case of an emergency and usually yields higher interest than a traditional savings account, a high-yield savings account is a great location to keep your emergency fund. Many banks and online financial institutions offer these accounts.
- Money market accounts: These types of savings accounts frequently provide greater interest rates than conventional savings accounts. These accounts frequently have minimum balance restrictions and might have a monthly withdrawal cap.
- Certificate of Deposit (CDs): CDs are a form of savings account that provide a fixed interest rate for a predetermined amount of time. Although certificates of deposit (CDs) frequently have higher interest rates than savings accounts, you must put up your money in the CD for a predetermined amount of time, so they might not be the best choice for an emergency fund.
- Cash or checking account: While it’s not recommended to keep your savings in a cash or checking account because it typically earns very little interest, it can be a good option if you need fast access to your money.
Your financial circumstances and personal preferences will ultimately determine where you should keep your emergency fund. Take accessibility, earning potential, and any associated fees into consideration when deciding where to store your savings.
When Should You Use it
Your emergency fund really should only be used in cases of genuine emergencies, such as sudden and unexpected expenses or job loss. Knock on wood, here are a few examples of when it might be acceptable to use your fund:
- Loss of employment: If you lose your job and don’t have any other sources of income, you might need to use your emergency fund to pay your bills while you look for work.
- Medical emergency: In the event that you or a family member has a medical emergency, you may need to use your emergency fund to pay for any associated costs, such as hospital bills.
- Auto repairs: You might need to use your e-fund to pay for the costs if your vehicle breaks down unexpectedly and needs expensive repairs.
- Home repairs: Your emergency fund may need to be used to pay for any unplanned home repairs, such as a leaky roof or a broken furnace. Consider having a separate sinking fund for these types of emergencies though.
It’s crucial to keep in mind that your emergency fund should only be used for legitimate emergencies. It’s not for frivolous or unnecessary expenditures. Although it may be tempting to use your fund to pay for a trip or other luxuries, doing so can put your financial stability at risk. This could make you more susceptible to unforeseen events in the future.