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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.
So in this post, I will show you why an emergency fund is important and how to start an emergency fund.
WHAT IS AN EMERGENCY FUND
Emergency Fund is simply the amount of money saved to take care of unexpected and urgent expenses.
This expense can include 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 YOU NEED AN EMERGENCY FUND
Simply because you never know what is going to happen. And as long as you are alive and breathing, something will always happen.
Benefits of an Emergency Fund
1) Peace of Mind. Knowing that you are prepared for anything that can happen will keep you sleeping soundly at night.
2) Protect Your Savings. You will be confident that you would not need to tap into your savings account if something happens.
3) Stay Out Of Debt. An emergency fund will prevent you from adding more to your debt.
4) Maintain Your Lifestyle. If a job loss happened, you will be confident that you have the fund to get you by until you land your next job.
5) Afford Unexpected Expense. Your emergency fund can cover for unexpected major health expenses, emergency pet care, bigger than expected tax bill, etc.
6) Afford To Help Others. When a friend, family or relative is in a financial crisis, you will be able to help them because you have an emergency fund.
7) Afford Unexpected Travel. At some point, a family, a relative or family passes away from out of state or country and you need to travel. It can be costly but you will be able to afford it because you have money set aside.
HOW MUCH SHOULD YOU SAVE FOR AN EMERGENCY FUND
The amount of Emergency Fund depends on your life’s situation.
If you are just starting out, 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 have any idea what your expenses are, check out this post on how to set up a budget.
It takes time to build an emergency fund unless you have a huge chunk of money, sitting around that you do not know what to do about it.
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 TO START AN EMERGENCY FUND
If you already have some savings, you can set aside $1000 for an emergency. You will then work on beefing it up until you reach the 3-6 months’ worth of expenses.
If you don’t have some savings, here’s how to start an emergency fund,
1) Make A Monthly Budget
When you have a monthly budget, you are aware of your income and expenses. From there, you will be able to know how much you can set aside for the emergency fund.
2) Decide On Your Emergency Fund Goal
If you are just starting out, aim for $1000. As you start building your emergency fund, you can work on saving 3 to 6 times your monthly expenses.
You have to take note though that you have to tackle your debts first before building up your 3-6 months emergency fund.
3) Set A Specific Amount To Set Aside Every Month
Refer back to your monthly budget and figure out how much you can set aside for your emergency fund. Develop a plan that you can stick to.
You can have the amount debited from your account automatically every month.
4) Keep Your Emergency Fund Accessible
You would want to keep your emergency fund in a place where you can have access to it immediately in the event that you need it.
It can be in a regular savings account that grows some interest.
5) Stick With Your Plan
For every goal to be met, you need to stick to your plan. It is the hardest part of the process but if you keep your eyes on the prize, you’ll most likely succeed.
6) Replenish Emergency Fund ASAP After You Use It
When you tapped into your emergency fund, you’d want to make sure to replace it as soon as you can.
There you have it!
Having an emergency 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 emergency fund to pay for it.
It felt good that I did not have to tap into our savings or use a credit card.
If you want to have the peace of mind, keep yourself out of debt and be able to afford unexpected expenses, then you should start an emergency fund.