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I still remember that time when I got a flat tire and found out that it was so bad that I needed to replace it. I was not prepared for this sudden expense so I had to swipe my credit card
This would not have happened if I had an emergency fund.
Emergency Fund is simply the amount of money saved to take care of unexpected and urgent expenses. This expense includes sudden home repairs, car repairs, medical expenses, loss of job and etc.
For an expense to be qualified as an emergency, it should be necessary, urgent and UNEXPECTED.
According to CNBC, there are only 39% of Americans who can afford a $1000 emergency. That way too low.
Why do we need it?
Simply because we never know what is going to happen. And as long as we are living, something is always gonna happen.
Benefits of an Emergency Fund
Peace of Mind! Knowing that you are prepared if anything happens will keep you sleeping soundly at night.
It will also help you stay out of debt or prevent you from adding more to your debt. If a job loss happened, you will be confident that you have the fund to get you by until you land your next job.
How Much Should I Save for an Emergency Fund?
The amount of Emergency Fund depends on your life’s situation. If you are just starting, it is recommended to have at least $1000. Once your debts are paid off then you can start saving more.
Financial advisors also recommend that if you are part of a two-part income then you should have three months worth of expenses in your emergency fund. And if you are a one-income household or self-employed, you should have a 6-month worth.
If you do not know your expenses yet, check out my post on how to set up a budget.
It takes time to build an emergency fund unless you have a huge chunk of money that you do not know what to do about.
What is considered as an Emergency?
The emergency fund should only be used for things that you did not budget for. Things that happened unexpectedly and needed to be taken care of immediately.
According to Dave Ramsey, a financial guru, an emergency must be UNEXPECTED, NECESSARY and URGENT.
It can be an unexpected medical cost, unexpected home repair or car repair or expenses during a job loss.
How do I start saving for Emergency Fund?
You can start by first making
You have to take note though that you have to tackle your debts first before building up your 3-6 months
Also, when you tap into your emergency fund, you have to make sure to replace it. You will add it in your monthly budget until you reach your target amount.
Having this fund does make a huge difference. Recently, we had a problem with our plumbing system that requires big repair. Since this is unexpected and needed to taken care of right away, I used our fund to pay for it. It felt good that I did not have to tap into our savings or use a credit card.
So YES, you really need an Emergency Fund.
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