Hello venturous people. In today’s article, I’m going to explain what an emergency fund is, why is important to have one and when you should use it.
Imagine this: life throws curveballs, like a sudden car breakdown or a surprise doctor’s visit for your pet. That’s where the superhero of your finances comes in – your emergency fund! In my world of money wisdom, I’ve seen how this special fund saves the day. Buckle up as we dive into the awesome world of emergency funds and how they rescue your wallet when trouble shows up unannounced.
Table of Contents
What Is An Emergency Fund?
An emergency fund is your cash reserve that’s specifically set aside for unplanned expenses or financial emergencies such as medical bills, sudden loss of income, or car repairs.
I would say that building a “cash bank” is best bet you can take against life’s bad breaks. Is probably the most important financial move you can make after clearing bad debt, of course.
What Are Emergency Funds For?
When your job’s steady, health is in check, and you’re making more than you spend, saving money might not cross your mind. It didn’t cross my mind for my first 7 to 8 years of my working life. I believe, the mindset was changed also by the arrival of my kids.
But without savings, it’s like walking on a wobbly rope – a tiny push and you’re in trouble. There are plenty of smaller mishaps waiting to happen which can affect your short term financial “health”, such as:
- Sudden job loss
- Medical or dental emergency
- Unexpected home repairs, such a pipe burst while you were away.
- Car issues. It happened to me before I was heading to an important meeting. Thanks god for Uber. True, was expensive, but I’ve managed to get there in a reasonable time.
- Unplanned travel expenses, such a dear one got ill and you need to travel to see them.
Of course, are other ways to deal with unexpected expenses.
Other ways of dealing with unexpected costs
Insurance is another way to cover unexpected expenses. And you should definitely consider it, such as life insurance, family income insurance, etc. However, these can fail to pay you in time to cover your daily expenses and keep you afloat. Cash is king as is said over and over.
Pay priority debts before saving for emergencies
Awesome that you’re taking steps to grow your emergency fund, but before you dump all your extra cash into it, is better if you’re dealing first with:
- Credit card debt
- Unauthorized overdraft
- Pay-day loans
- Door-to-door lending or home credit
- Mortgage payment arrears
- It’s smarter to clear these out first for long-term savings.
However, if you’re on track with mortgage payments and other payments, then boosting your emergency fund is a smart move.
How Much Should You Have In Your Emergency Fund?
As rule of thumb I’m looking to give myself the financial buffer of having at least 3 months’ essential outgoings available at my finger tips. With time, I would push this to “6 months cushion”.
So, for example sake, let’s say you are spending £1,500/month on essential expenses such as rent, food, heating bills and other things you can’t live without. Then your minimum emergency fund should have in it about £4,500.
Ideally, you should think about your emergency fund in terms of monthly after-tax income rather than an arbitrary and set amount of cash. Measure what is your monthly outgoing and multiply that by at least 3. A good exercise to do that is to actually use a budget planner, if you don’t use one already.
How Can You Build An Emergency Fund
The basic principle is to save often and smaller than big savings once in a while. Just remember, while it’s a good idea to set up your emergency fund as soon as possible, it’s best to balancing out in such a way that you maintain your lifestyle while you are saving regularly.
The secondary benefit of saving little by little on a regular basis than putting in big chunks occasionally is that you are making a habit of saving. Also you don’t strain your budget. Plus, it helps you manage your spending week to week or month to month.
If that’s not doable, save whenever you can. Even small amounts add up. Is a certainly better to have something than nothing.
Similar to how you’d save up for special things like a wedding or a new car, figure out how much you need to save and set up automatic savings transfers for that amount.
Imagine what you’re saving for – be it an unexpected car issue or replacing something pricey like a cooker or washing machine. This keeps you focused and on track. A chart on the wall can help you. Even a direct debit will help you as is automatically done every month.
If you have debts, decide if it’s better to pay them off first or if you can, balance saving and repaying at the same time.
Benefits of Having an Emergency Fund
Obviously, one of the main benefits of having your emergency fund is financial stability. However, are other pros for having an emergency reserve of cash; and these are:
- Reducing your stress levels – When unexpected situations arise, they can mess up your finances and make you anxious. If you don’t have a safety cushion, you’re on the “financial” tightrope, crossing your fingers to avoid troubles. Having an emergency fund means you’re ready for whatever life throws your way, without piling money stress on top. It’s like having a shield against money worries.
- You are getting better financial decisions – When you have cash for unforeseen things, you are less prone into getting exposed to ridiculous fees or interest rates. Think about it, if you are having car trouble your immediate way to fix it is to go and pay with a credit card or a loan for which you will pay an interest. And in some cases, the interest rates are incredible high.
- It keeps you from spending on a whim – You know the saying “what you don’t see, you forget about it”? That’s the trick for stashing your emergency cash. Works for you in two ways. One is that you are less tempted to spend money unnecessarily, like on fancy clothes or the latest TV as you have a less wiggle room in your budget. The second way is that if you are building the right mindset to hold onto the money and keep it out of reach. Plus, if you put it in a different account, you’ll always know how much you’ve got and how much more you need to save.