Basic Finances: Do you have an Emergency Fund?

There is a simple financial principle that often gets overlooked but plays a critical role in a secure financial future, the emergency fund. Life comes at us from all directions and having a safety net in the form of an emergency fund can make all of the difference when unexpected expenses come along.

What is an Emergency Fund?

The fundamental role of an emergency fund is that it can act as a financial cushion used to cover cover unforeseen expenses or emergencies. The thought is that it is a financial safety net that protects a person from falling into debt when unexpected situations like medical emergencies, sudden job loss, car repairs, or home maintenance arise.

Why is it Important?

1. Financial Security: Probably the top reason to have and emergency fund. It is the shield against financial hardship. It keeps you afloat during sh!t times and allows people to avoid the need to take out a high-interest loan or pay for something with a credit card.
2. Peace of Mind: Knowing a safety net is in place will reduce stress and anxiety about unexpected financial challenges. An emergency fund gives peace of mind and increases the length of time one might need to navigate life’s uncertain situations.
3. Avoiding Debt: Unexpected expenses will force a person into debt if they are not prepared. An emergency fund ensures your urgent needs are covered and acts as a buffer while you figure it out. This will allow you to make sound decisions and not increase debt.

How big of an Emergency Fund?

Financial experts often recommend saving three to six months’ worth of living expenses. The way to calculate this is to list out all of your essential monthly expenses and add them up. These items include things like rent, utilities, groceries, and insurance.

Lets use an easy example to start. Lets say all of a person’s essential monthly expenses equal $3000.00 per month. This does not include things like Netflix subscriptions.

If the monthly dollar amount is $3000.00. A three month emergency fund will be $9000.00. A six month emergency fund will be $18,000.00. $18k can be a big number, so start small and gradually build an emergency fund as you go. This has been the best approach I have found.

Where to keep an Emergency Fund?

Two key factors should decide where an emergency fund is stored. Accessibility and Safety. The emergency fund should be easily accessible when times are urgent. Most often a savings account is an advisable place to keep these funds. It is important to note that emergency funds should be kept separate from your regular checking accounts. A high-yield savings account or a money market account is a great place to store an emergency fund because they can offer higher interest rates than a standard savings account.

Simple Steps to Build an Emergency Fund?

1. Set a Goal: Calculate how much you need to save based on your monthly expenses and financial situation.
2. Budget: Put a portion of your income specifically for the emergency fund. Consider it a non-negotiable expense and build it.
3. Automate Savings: Set up automatic transfers from your paycheck to your emergency fund account. This creates consistency in saving and removes the temptation to spend those funds on something else.
4. Reduce Expenses: Cut back on expenses and find ways to save more money to speed the growth of the fund. Once the fund is fully funded, use the money other places.

When to Use an Emergency Fund?

The whole purpose of an emergency fund is to handle unforeseen, necessary expenses. It is not a fund that should be accessed monthly or even yearly. It is crucially important for individuals to differentiate between needs and wants. An emergency fund should only be reached into when a genuine emergency pops that will threaten your financial stability.

We know this world is uncertain, and being prepared for financial uncertainty is where an emergency fund kicks in. Wants are not a thing with emergency funds. The only want that is needed, is the want to have an emergency fund. Building this financial safety net into your finances will take a bit of discipline upfront, but the security a fully funded emergency fund provides is invaluable.

If you need a hand to figure out your Emergency Fund,

Hit me up and I will get you on the right track. Helping people is where my heart lights up every single time.

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