Any financially responsible adult should have an emergency fund. Here are the guidelines to build and use an emergency fund that is there whenever you need it.
The future is unknown, but you can at least financially prepare for the unexpected by setting aside money for an emergency fund. These savings, which should be held apart from your regular savings, should ideally be enough to cover three to six months of living expenses. If your pay is reduced, you lose your job, or you have a significant unanticipated bill, your emergency funds will act as a life raft to save you from having to use a credit card.
An emergency fund is a financial necessity for all those who seek financial stability. The emergency fund is a cash buffer against financial troubles such as losing your job, being evicted, or being in an accident. It is comparable to, but not always the same as, an emergency safety net. It is the financial lifeline that keeps you afloat through difficult times.
On some level, everyone understands the importance of having some funds to use in case of emergency; but, what those savings look like, where they’re housed, and what they’re used for are facets of the emergency fund that aren’t as evident.
To begin, keep in mind that everyone is unique, as are their financial situations. When reading personal finance advice, it’s critical to keep everything in context of your specific financial circumstances and do what’s best for you.
However, if you managed to avoid serious financial consequences during the Covid-19 pandemic and do not have an emergency fund, now is the time to start one. If you had to rely on your emergency reserves for a few months but are now in a better financial position, do everything you can to replenish those funds in case of another financial setback.
If you are ready to save, here is what you should do to get through almost anything.
1. You must have a financial goal to work toward
Simply telling yourself that you’re attempting to save money isn’t enough, it should also be specific. Set a modest, but reasonable, savings target for your emergency fund, write it down, and work toward it. Part of the reason having a goal in mind when saving is crucial is to ensure that you keep to your plan to save up for whatever that goal may be, and that you achieve it.
Having a savings or financial goal—whatever you want to call it—may keep you motivated and on track, much as setting a fitness goal to run a race or lift a specific amount of weight can keep you active.
2. The standard continues to be three to six months’ worth of expenses.
For many years, the most common goal for a fully funded emergency fund has been to save three to six months of expenses.And for many years, it has been the default recommendation, and it is still acceptable to the vast majority of the populace.This is when the context of your financial situation comes into play:
Most people can live on three to six months’ worth of expenses (rent or mortgage, car payments, bills, groceries, etc.) in savings, but someone who is the sole provider for his or her family, self-employed, or has a chronic medical condition may benefit from a larger emergency fund. Finally, make sure you have enough money to cover any unexpected bills.
3. Always keep in mind that you need that money to be liquid
Some people put their savings into investments, while others store them in a jar. Whatever you do, keep in mind that the money must be liquid: If a tragedy strikes (a layoff, a sudden illness, a car breakdown), you want to be able to access that money promptly and without incurring penalties.
Maybe you have six months’ worth of expenses saved, but only three months invested; that’s fine as long as you have access to a large sum of money when you need it. You want to make certain that no money is at stake (as it would be in the stock market, for example). CDs, low-risk investments, Roth IRAs, and other similar options are popular choices for emergency fund storage, but experts prefer savings accounts for the most convenient access to your money.
4. Always keep in mind why you built an emergency fund
Even if you’ve successfully developed an emergency fund, forgetting why it exists can jeopardise your hard-earned financial success. All of our savings are there to serve a function or to help us achieve a goal. Keeping such objectives in mind will assist people in staying on track in the future.
We get into trouble when we lose sight of why we’re saving money or what we’re saving money for. The goal of emergency money is to keep you financially afloat during difficult times. Staying on track entails identifying and adhering to the criteria of an emergency. Setting money aside in a separate account for those goals is a good idea, but using your emergency fund to cover them is not.
5. Use your emergency fund only at times of emergency
Knowing when to use and when not to use your emergency fund will help you make the greatest use of your savings. Yes, technically, your emergency fund is your money.
However, once you’ve set cash aside for emergencies, you owe it to yourself to spend it only when absolutely necessary. Before touching your emergency fund, always check to see if the money is going toward anything necessary for survival.
Even if it’s absolutely required, you may be too hesitant to tap your emergency fund at times. As a general rule, you can use your emergency funds to cover unexpected, required, and urgent needs such as: living expenses following a job loss or pay cut; emergency home repairs; and emergency, necessary medical bills.
Even in true crises, considering other options before depleting your emergency fund will help you keep your resources intact.