Life sometimes throws unexpected curves or unplanned expenses which can affect our finances and put one in a mess. Here’s how having an emergency fund can help, how much to save and the situations that warrant using it.
What is an emergency fund?
Emergency fund or rainy day fund is a stash of cash you set aside to cover emergencies or unplanned financial expenses. It is a financial cushion when life takes an unexpected turn.
Why an emergency fund important
Your emergency fund is the shock absolver between you and life when you experience
- Loss of job
- Auto theft or car breakdown
- Unexpected home repairs
- Medical crisis
How much you need to have in your emergency fund
A good emergency fund goal should be to keep 3 to 6 months of your living expenses. The money should be used for a real financial crisis, not when you want to buy a new pair of shoes or a new dress for your best friend’s wedding.
How to get started
If you are considering starting one, here are what you can do:
Step 1: Figure out how much you need to have in your emergency fund
Step 2: Open a separate savings, preferably a high-interest savings account
Step 3: Pick a daily, weekly or monthly savings goal
Step 4: Start small if you must but keep going!
Step 5: Regularly reevaluate your emergency fund anytime you have a major life change(like a salary increase, bonus or an addition to your family)
If you use your emergency fund for a truly unexpected expense, reup your contributions once you’re financially stable.
How to achieve your emergency funds goals
- Save bonus or any other spare money in your emergency fund
- Start a budget and cut down on unnecessary expenses
- Make having an emergency fund a priority.
- Set up automatic transfers for your fund until you reach your goal
- Keeping it in a high-interest savings account
Remember, your emergency fund should be in a savings account, safe and easy to access in your time of need but not so easy that you’ll dip into it on a whim.