When we talk about our finances, it is without a doubt that we run into what they call Emergency fund. What is and emergency fund and do we need it?
Emergency Fund is simply the amount of money saved to take care of emergency expenses. This cost includes home repairs, car repairs, fertility expenses, other medical expenses, loss of job, etc.
For an expense to be qualified as an emergency, it should be necessary, urgent and UNEXPECTED.
(Please note that this post may contain affiliate links.)
What Are The Benefits of Emergency Fund?
Gives Peace of Mind
Knowing that you have a buffer if something unexpected happens will make you sleep better at night. It decreases the anxiety of not having enough money to cover emergencies.
Prevents Increase in Debt
If a financial expense suddenly arises, you will not pull out your credit card because you already have money set aside to pay for unexpected expenditure. It will make the creditors unhappy but will definitely make your saving account ecstatic.
Provides Financial Security
In addition to emergency fund giving us peace of mind, it also gives the sense of financial security. If we have this fund, we will not be worrying about not having enough income to cover any emergencies. Consequently, we will be able to make better decisions financially.
Provides Protection From Job Loss
In our economy nowadays, unemployment is sometimes inevitable. Job loss happens every day, and we do not know if tomorrow will be our turn.
Can you imagine the horror of waking up the next day and finding out that you do not have a job? How are you going to pay the bills, food and other expenses without getting buried in debt?
If you have an emergency fund, you wouldn’t have to worry about your expenses. You will just have to worry about finding your next job.
An emergency fund also protects your investment. It will prevent you from withdrawing your investment to pay for emergency expenses.
How To Save For Emergency Fund?
There are ways on how to save for emergency fund. It can be hard and will require a little sacrifice.
You can start by cutting down your expenses and allotting a portion of your savings towards your fund. If this is not possible, you can also start earning more by doing side hustles.
How Much Should You Have On Your Emergency Fund?
The amount depends on your status in life. Dave Ramsey recommended that if you are part of a two-part income, then you should have a three-month worth of expenses in your emergency fund.
And if you are a one-income household or self-employed, you should have a six month worth of expenses in your emergency fund.
Dave Ramsey, a financial guru, recommended that if you have other debts, you should start saving for a $1000 Emergency Fund. Once you have that one grand, then you can start tackling your debts.
When all your debts are taken care of, then you start funding your emergency fund until you achieve a 3-6 month worth of expenses.
Join the FREE Build Your Emergency Fund Challenge to start building.
Where Should You Keep Your Emergency Fund?
It should be kept somewhere where it is easily accessible. You should have a debit card for it to be able to access it immediately.
We have our fund on a checking account separate from our family accounts.
There you have it!
By now, hopefully, you are convinced that you need to have an emergency fund. The earlier you start, the better.
You can find out more how to manage your money by checking out Dave Ramsey’s The Complete Guide to Money.
Do not forget to join the FREE Build Your Emergency Fund Challenge.