Whether you like it or not, you need an emergency fund. No matter if you’re earning a ton of money per month or you have healthcare insurance, having an emergency fund is a necessity you cannot afford to disregard if you want peace of mind financially.
In today’s age when more people have massive debt they can barely get out from, you don’t want to join their ranks. One of the best ways you can do that is to set-up an emergency fund to weather those unexpected expenses and financial emergencies that may come at you in most inopportune times.
What exactly is an emergency fund?
An emergency fund, as the name implies, is a type of savings you set aside specifically for emergency purposes. Maybe you lost your job or you’re unexpectedly faced with a massive medical emergency. Maybe your car broke down or your heater at home needs to be repaired. Whatever unexpected expenses you may encounter at one point or another, your emergency fund will serve as a safety net.
When you have an emergency fund you can easily access, you don’t have to resort to debt to meet any unexpected expense. You don’t have to worry about having no money to pay the rent or buy groceries in case you lose your job because just like the ants, you’ve saved up enough for the rainy day. That’s why emergency funds are important and always advisable no matter your current situation or monthly earnings.
How much emergency fund do you need?
Ideally, you need an emergency fund that amounts to at least 3 months of your expenses. If you lose your job unexpectedly, you should have at least 3 months’ worth of emergency fund to give you time to get back on your feet again. For example, if you monthly expenses equal to £3,000 including rent, groceries, gas, debt payments and everything in between then your goal is to set aside at least £9,000 for your emergency fund. If you can save more, then you should go for it.
When setting up your emergency fund, make sure the money is placed in a fairly liquid account with reasonable interest rates earnings. You should be able to access your emergency fund quickly and inexpensively in the event of an unexpected expense. This means that you should stay away from investments that come with high withdrawal charges or fees. That also means no long-term investment accounts for your emergency fund. You’d be better off to settle with a savings account or a short-term certificates of deposit.
How do you save up for an emergency fund?
Just because you’re saving for an emergency fund doesn’t mean you don’t need to save some more. Don’t mistake an emergency fund with a traditional savings account. This means that you actually need more than an emergency fund if you want to be serious with saving money.
But how do you save up for an emergency fund if you have another savings account you need to pay attention to? It all boils down to balance. When you’re planning your budget, you need to divide your savings into two accounts. You don’t have to start big if it’s going to be hard for you financially. You can start small, like 3 to 5% for an emergency and another 5% for your main savings account. The trick is to keep adding funds to your emergency fund each month until you reach the 3-month recommendation. Once you’re comfortable with the amount of money on your emergency fund, you can direct all your savings to your main savings account.