How and Why You Should Start an Emergency Fund
Start an emergency fund. This is the number one most spoken about personal finance tip, every personal finance book, blogger and writer goes on and on about the necessity of finally starting an emergency fund. The sheer number of things you’re supposed to do when it comes to your personal finances can be extremely overwhelming: become debt free, invest, buy a house, cut back on spending and finally start an emergency fund.
No matter how many financial tips, tricks and ideas we suggest you try the thing that you should be focused the most on, after meeting your basic needs and while trying to stay within a reasonable budget, is starting an emergency fund. Here are all the ins and outs of starting an emergency fund.
What Exactly is an Emergency Fund?
So now that you know you should be working towards starting an emergency fund you probably want to know what exactly it is. An emergency fund is easily accessible reserve of money, usually most people will open a separate bank account so that it’s easy to monitor. The problem that most people face is deciding what an emergency is; obviously it will be different depending on lifestyle, age and income. Just remember that an emergency doesn’t typically mean a new car or PlayStation.
Why You Really do Need an Emergency Fund.
Life happens and that means that emergencies will happen both when you least expect them and when you’re not prepared. This is where an emergency fund becomes essential, because you can’t predict the future you should at least be prepared for it. Here are a few examples of life emergencies that would require the assistance of an emergency fund.
- A car accident (or any kind of accident). There could potentially be both medical bills and car repairs.
- A job opportunity that requires an expensive move across the country.
- Damages to your house that need to be fixed right away.
- Serious health issues.
- Being laid off from your job.
Like we said before everyone’s definition of an emergency is different but in the case of the above emergencies, people who unfortunately experience these emergencies but have emergency funds will end up in a much better place financially than those who do not have emergency funds. The average person typically feels like they cannot afford to have an emergency fund because their hard earned cash is needed elsewhere, but the truth of the matter is what you really can’t afford to not have an emergency fund. Think of it as an investment in your future and the future of your family. If something ever were to happen you’ll be prepared and that’s what’s most important.
So How Much Should You Save?
The consensus is everyone thinks having an emergency fund is essential, but that’s where the agreement ends. No one can agree on how much money is enough. There are people with opinions at both ends of the scale, some believe an entire years’ worth of salary is the best amount but others think that simply having around $1000 is all you need. Both seem either too much or too little to us so we suggest an amount that falls somewhere in the middle, but again we think it depends on your lifestyle and salary.
So unfortunately there isn’t a real concrete answer to the question of how much an emergency fund should have in it. You need to decide for yourself what’s best for you and your family and your current life situation. If you own a house then think about having enough to pay for the mortgage for at least 3 or 4 months. If you enjoy extreme sports and being really active then think about medical injuries and medical bills. If you’re single and rent an apartment and don’t have too many responsibilities don’t think you’re in the clear, you should still have at least some cash put aside for car repairs. Whatever you decide just make sure it’s the best fit for you and your life.
How to Get Started
After making the decision to finally start an emergency fund and then figuring out how much you need to put aside, you now need to start saving. It can be just as easy as putting a small amount of your paycheque into you emergency fund bank account every time you get paid. And guess what? It really should be that easy, if you make it too hard for yourself then you’ll be less likely to keep up with the responsibility. Just make sure you’re not saving too much money and then having to use credit cards to make up the difference, the goal is to be able to meet your daily needs and be as debt free and possible while saving a small amount for emergencies.
Consider the type of bank account you’ll be using for your emergency fund and its location carefully. Don’t make it too accessible as you don’t want to be tempted to spend on things that don’t count as an emergency. You still want to be able to get to the money just in case you actually do really need it but maybe don’t carry the access card to the account around with you while you shop.
Some Essential Advice
If you’re still worried about the details of starting an emergency fund then here is some essential advice what should help you make the right decisions for your situation.
- $10,000 is an unrealistic goal for most people, start with a more attainable amount like $2,000 to $3,000 and work from there.
- Once you’ve start saving and you’ve got a base amount of around $2, 000 then work towards about 3 months’ worth of expenses.
- Everyone’s situation is different which means everyone’s emergency fund will be different, don’t worry about what others have instead focus on what you need and what will work best for you.
- Once you start saving do not touch it. Most people don’t have an emergency fund because they spend it; keep yours in the bank until a real emergency happens.
- Make sure your emergency fund is working for you and not just sitting in a bank account doing nothing. Choose a high interest savings account so you can benefit from the interest it’s earning.
- Starting an emergency fund is important but being debt free is also very important. If you have a lot of debt then work on paying if off at the same time you’re saving for your emergency fund.