What Is An Emergency Fund And Why You Should Have It
No one ever thinks that some bad times might occur. But, unfortunately, they might happen to just any of us. You could accidentally break a leg, or your fridge might stop working… These are just some of the thousands of unpredictable scenarios that could come out of nowhere.
In order to live through these kinds of situations as stress-free as possible, it is smart to build your emergency fund on time. Let’s see how you should do it and how early should you start saving your money. But first, let’s explain what an emergency fund is and what are the rules you have to follow in order to build a successful one.
What Is An Emergency Fund?
An emergency fund is a bank account with money savings that are meant to cover large, unexpected expenses. Some of them might include:
- Medical expenses
- Home-appliance repair/replacement
- Car repairs
- Natural Disasters
You never know what the future holds, so it is better to be prepared and prevent yourself from borrowing money and going into debt when unpredictable events occur. In fact, building an emergency fund might help you lead a more stable life if anything from these things occurs. If you don’t have enough money that you could live off for a couple of months if you lost your job tomorrow, you should start saving for “emergency”.
Do I Really Need An Emergency Fund?
The truth is that literally anyone on Earth could be struck with an emergency situation. So, if you’d rather avoid having to borrow money from your relatives and friends, then you definitely need one. Everyone needs an emergency fund. Especially if you have children and are building a family.
The times of financial emergencies never come when you have lots of money, but as a rule of thumb, they always occur when you’ve already spent a major part of your income.
So, practically an emergency fund can not only save your reputation, stability and provide you with more financial security, but it will also prevent you from relying on high-interest loans or credit cards.
Emergency funds are a great way to stop yourself from going into (further) debt.
How Much Should I Save?
One of the costliest financial emergency cases is unemployment. If you lose your job, you would still need to pay for necessities. Having living expenses without having a regular income and a good savings bank account, will inevitably drain all your money and quite probably lead to debt and borrowing money.
So, the ideal way to save money for an emergency fund is to get prepared for these situations. The fund should be able to cover your basic expenses for at least 3, or ideally 6 months so that you can have a stress free time while looking for a new job.
Of course, the amount you’re able to save on a monthly basis depends on your financial circumstances. However, what’s important is to start saving, even if you start small. Be realistic when setting your saving goals and determine how much should you save by the end of each month. This way you will build a strong start.
Imagine that you have to replace your fridge, and you have $500 in your emergency fund bank account. It will definitely feel good that a financial emergency like that won’t influence your regular monthly expenses and your “pleasure” money.
Rules Of An Emergency Fund
You have saved $1000 so far, but you just stumbled upon the perfect dress/watch you have been wanting for a long time now. Your first impulse might be using your emergency fund’s money in order to please yourself, but this is not what the fund is meant for.
You should avoid using this money for pleasure and things such as:
- Eating out
Set up good rules and really commit to them and soon you will see your emergency fund growing, just like your financial security. Committing to these rules will also be much easier for you if you find a way to make your emergency fund not too easy to access. Make sure your emergency fund bank account is separated from your personal use bank account, so you can avoid temptations like the one we mentioned above.