Living life, there are always unforeseen incidents that happen that you can never plan for. The roof of your house needs fixing after a bad storm, your car transmission suddenly needs to be replaced, or horror of horrors, you lose your job. Whatever life throws at you, there is a way to be as prepared as possible. That’s where the emergency savings fund comes in. Not only should you have a regular savings which you can use for buying larger items or a vacation, you should also have an emergency savings set aside that is only for emergencies. If all goes well, then hopefully you have enough in your regular savings to cover anything that happens, but if not, then that’s what the emergency fund is for.
What is an emergency fund?
This is a lump sum that you set aside that is entirely separate for your normal savings account. The normal savings account is for regular items that come up that you can plan for. The emergency savings fund is for major unforeseen events that occur. Needing new clothes for a party isn’t considered an emergency. Things like unexpected car repairs and house fixes that you don’t have enough in your normal savings account are examples. It’s best to keep the emergency fund in an online savings account where you can’t easily touch it. This keeps temptation at bay and keeps your fund intact.
How much should you save in an emergency fund?
Some people say six months of expenses and others say three months. A lot of it depends on your current financial situation. If you have a steady full-time job, then your emergency fund can be a lower amount. If you’re self employed or your industry is unstable, a higher amount is recommended. Another consideration is if you have any dependents. Building up a higher amount for your emergency fund is important with the more responsibilities you have. It also depends on your state of mind. I am self-employed while my husband has a steady full-time job. We keep an emergency fund that covers about five months. Once we start a family though, we will increase that amount to cover ten months or a year. We both feel more comfortable having a larger emergency fund.
Why do you need it?
Many people fall into debt because they do not have that emergency fund and end up using credit cards instead. With the high interest rates of credit cards, these people will have a tough time digging themselves out of debt. It is essentially a safety net. Any emergencies that come up can be taken care of with this fund. In the worst scenario where someone loses a job, they have some time before they run out of options. In shaky industries, job security might not exist at all. It can allow you to be able to take risks if you need to to build up a business also.
When should you use it?
Ideally, you have an emergency fund and are saving up regularly also. The emergency fund should be your absolute last resort. Use your normal savings account first before you even touch that emergency fund. If you really have no other options, only then should you use it! Don’t reach for that credit card because you might end up getting in debt.
If you do have an emergency fund and end up using it, build it back up as soon as you can. There’s nothing like knowing you have money set aside for tough times. With all the things that can happen unexpectedly, it will be reassuring to know that you have an emergency fund set aside for it. You can’t really do much about what life throws at you, but you can be as prepared as possible.
Do you have an emergency savings fund? Have you ever had to use it?