The Importance of Having an Emergency Fund

Having an emergency fund may not sound exciting, but it’s one of the most important things you can do to protect yourself from financial hardship. An emergency fund is a dedicated savings account that you only use in case of emergencies like natural disasters, medical emergencies, or other unforeseen situations where you need money fast and can’t wait until your next paycheck. Whether you just started your first job, are saving for something big like a house or car, or just want to make sure you have money set aside for unexpected expenses, an emergency fund is a great place to start. A separate emergency fund will help keep you from dipping into your retirement savings or taking out a loan when times get tough. Let’s take a look at why that is and how to build your own emergency fund.

Why is Having an Emergency Fund so Important?

We all know that life happens, but many of us don’t have a plan in place for dealing with those unplanned situations. Life events like losing your job, a medical emergency, or having to travel for work can happen at any time and come with a price tag that can be difficult to cover if you don’t have savings set aside. Having an emergency fund will give you peace of mind knowing that you have money set aside to cover these types of expenses so they don’t put a dent in your monthly budget. Aside from providing a safety net in case of these unplanned expenses, an emergency fund can also help you avoid making expensive mistakes with your finances. For example, if you have a car payment and that car breaks down, you could end up having to default on your car loan. If you have credit card debt and your furnace breaks, you have the option of taking out a high-interest loan to cover the cost of repairs. Having an emergency fund in place will allow you to avoid these types of mistakes.

When should you use your emergency fund?

There are an almost endless number of situations that can fall into the “emergency” category. Some common examples of emergencies include: - Losing your job and needing to continue paying your bills while searching for a new job - Medical expenses (including travel costs) - Natural disasters in your area - Car repairs - Home repairs - Legal expenses - Trying to conceive and having to visit a fertility clinic - Buying a house or car - Unexpectedly needing to travel - Going back to school The list of unplanned situations is endless, but the important thing is having a plan in place to deal with them should they arise. Using your emergency fund as a crutch to cover these unexpected expenses is never a good idea, but it’s important to be prepared.

How much should you be saving in your emergency fund?

The amount you should be saving in your emergency fund really depends on what type of emergencies you’re expecting, your current financial situation, and your goals for the future. There isn’t an exact amount that is right for everyone, but a good rule of thumb is to have at least three to six months’ worth of expenses saved in your fund. It’s recommended that you have at least three months’ worth saved for every person in your household. For example, if you need £4,000 to cover your monthly expenses, you should have at least £12,000 saved in your emergency fund. If you have a family, you’ll want to add their expenses to your budget to get a more accurate picture of how much you’ll need to save in your fund.

Steps to Build Your Own Emergency Fund

Building an emergency fund is easier said than done. It’s not something you can save up overnight, but if you follow these tips, you can get there in no time. - Track Your Spending - Track your spending for a few months to get an idea of how much money is coming in and going out each month. This will help you figure out where you can cut back so you can start saving more. - Save 10% - Saving 10% of your income is a good rule of thumb for anyone trying to get ahead financially. You can start by saving 10% of your income, and then increase your savings once you get closer to your goal. - Make Saving Automatic - Setting up automatic withdrawals so that the money gets put straight into your emergency fund will make it easier to save without having to think about it every time you get paid. - Set Realistic Goals - When trying to reach a specific savings goal, it’s easy to get discouraged when you’re not seeing results fast enough. One helpful tip is to set realistic goals for yourself. For example, if you need to save £12,000 for your emergency fund, don’t try to save it all at once. Instead, set a goal to save £100 per month and celebrate when you reach that milestone.

Conclusion

It’s easy to put off saving for emergencies, but it’s crucial to not only your financial well-being but also your mental health. Having an emergency fund will help you avoid taking out high-interest loans in case of a financial hardship, and it will give you peace of mind knowing that you have money set aside in case of an emergency. It’s important to start building your fund as soon as possible. Even if you only have a few dollars saved, it’s better than having nothing at all. As you get closer to your goal, you’ll be thankful you put in the work to save for the unexpected.