What is an Emergency Fund and How Should I Start One?

Many of us are living their lives paycheck to paycheck, and maybe only putting a little bit away for retirement or savings. Although it is a great start by putting money away for those things, an even fewer amount of people have money set aside as an emergency fund. You may not think you need an emergency fund, or maybe were just never told that you should have one, but it is an extremely good idea to have one because you just never know what could happen.

An emergency fund is a money set aside to help you be prepared for when the unexpected should happen and you need access to money. An emergency fund allows you to access this money rather easily if you should lose your job, need to make home or auto repairs, medical emergencies, or even the death of a loved one. Many emergency situations can occur and it is best to be prepared for when they occur, without having to rely on credit cards or loans from Credit Excel Capital Pte. Ltd. , which will add on more debts.

So how much should you have in your emergency fund? The amount can differ from person to person depending on each family’s needs, but according to the experts, you must have enough in the emergency fund for covering between 3 and six months which is worth of living expenses. The amount for your family will depend on how big your family is, any special needs, house payment, and whatever other expenses you would need to be covered during the financially hard time. 3-6 months of living expenses may seem like a lot, but if you or your spouse should lose your job, you still have bills to pay during the time it would take to find another suitable job. It is in your interest to plan for the worst case so that you are prepared just in case it happens, and so that any smaller emergencies can be covered much easier.

Not everyone has enough money to just simply set aside 3-6 which is months’ worth of living expenses tomorrow, next week, or even next month, but it is a wise idea to start putting some money away now. Don’t look at this and stress over how to get a few months of expenses put away as an emergency fund as soon as possible. Start small, putting a small amount away each week, whether it be $100 a week, or only $10 a week. Soon, you will not notice the small amount missing and can add a little more each week. This will not only create your emergency fund, but will also get you in the habit of doing, and be used to that certain amount of money no longer being there.

I used to think that an emergency fund was just a waste of time, as some of you probably do, and that no one needed it as long as they were careful. I soon learned how important an emergency fund was when my sister and her husband both got laid off from their job in the same month.

How to Build Your Emergency Fund

What is an emergency fund? An emergency fund is designed to help you survive in case you face a setback like a loss of income, disability, or another type of emergency.

Hopefully, you’ll never have to touch the money in your emergency fund. That would be great because that money will grow along with your other investments. If you do need to tap your emergency fund, that’s okay, because you’ll have the money to do so, and you won’t have to borrow. Borrowing puts you back in debt. (Your ultimate goal is to never go into debt again – that’s true financial freedom.)

Let’s work through the process of creating an emergency fund, step-by-step.

One: Determine How Much You Need

Some experts recommend you save three to six months’ worth of salary in your emergency fund. Others pick a number, like $1,000 or $2,000.

Either approach is fine, but in the end, there is no set number that works for everyone. Since everyone’s situation is different, let’s determine the right number for you.

Review your budget. Look at what you spend each month. The total is the amount you need every month to live exactly as you live, right now. That’s fine but if you face an emergency like a loss of job, do you need – or can you even afford – to live like you are living today?

Examine your budget, line by line. Which expenses can you reduce? If you had to, could you cut your magazine expenses? Of course, you could. Could you cut back on eating out, entertainment, clothing, etc.? Of course you could. Go through your budget, line by line, and eliminate or reduce anything you do not need to spend money on. The items remaining should be expenses like your mortgage payment, utilities, and food… in other words, spending required for you and your family to survive.

Add up your critical expenses. The dollar figure you arrive at is what you or your family needs to be able to live for a month.
Then take a step back. Can you live with what the number you reached? If it feels too harsh, go back through your list and play around with different scenarios. Maybe you would like to add cable back in, for example. That’s fine but keeps in mind anything you add back in requires you to come up with money to pay for that item. The key is to determine what constitutes an emergency (more on that in a bit.) After further review, determine a new monthly total, if necessary.

Once you finalize your list, multiply your monthly total by a minimum of three (ideally nine.) The resulting figure is what you will need to live on for three months (again, nine months’ worth of expenses would be even better) if you face an emergency like losing your job.

Leave a Reply

Your email address will not be published. Required fields are marked *