What is an Emergency Fund, and do I Need One?

Life is full of unexpected events and many of us have seen more than our fair share in the last few years! Unfortunately, you just can’t predict what will come your way and how it might ultimately affect your finances.

Financial surprises can be both stressful and expensive. Having a financial buffer such as an emergency fund can keep you afloat when you need it without having to worry about using credit cards or applying for high-interest loans. An emergency fund is money you save or put aside specifically for large, unforeseen expenses such as unemployment, medical expenses, major auto repair, or unanticipated home repairs.

Why You Need an Emergency Fund

Having an emergency fund to dip into if truly needed offers financial stability, but there are other advantages as well. Knowing that you have a safety net gives you confidence that should life throw you a financial surprise, you’ve got it covered and that keeps your stress level down. It also keeps you from making poor financial decisions when you are in the midst of what may already be an emotionally or physically stressful situation. The last place you want to find yourself while seeking financial stability is further in debt!

How to Start an Emergency Fund

For your emergency fund, it’s commonly suggested that you have at least three to six months’ worth of critical expenses saved up knowing that you would cut nonessentials from your budget in case of a job loss or major catastrophe. That can seem like an overwhelming amount, but even $500 saved can help when you really need it. It’s okay if you don’t have it all at once. Just start building your fund by saving smaller amounts on a regular basis. If you keep it up, before you know it you will reach your goal. Here are some tips to help you start building your emergency fund.

Decide the total you want to save and set a monthly savings goal—look at what you spend each month for critical expenses such as housing, food, health care, utilities, etc. and multiply by the three to six months you intend to begin saving. Set up a budget and move any available funds to your emergency fund.

Move money into a savings account automatically—if you have an option of dividing a paycheck into multiple accounts, have your monthly savings goal automatically placed in an account before you have an opportunity to find another use for it.

Adjust your contributions—check in after a few months and reevaluate if needed. If you haven’t saved as much as you hoped, perhaps you can adjust your budget. On the other hand, if you’ve saved up enough to cover your six months of expenses, you can shift your focus back to your other financial goals.

Your emergency fund is your best defense against unexpected events and financial surprises. It can help you avoid taking out costly loans or using credit cards to stay afloat when your income is reduced or on hold. Surprises in life are inevitable but being prepared with an emergency fund is an excellent way to lessen the stress they so often cause.