Your Emergency Fund: Building a Foundation for Financial Stability

Your emergency fund is one of the most important financial tools you have. It's not just a collection of dollars, it's an emergency disaster kit for your life. It provides peace of mind when unexpected expenses arise or if there are sudden job losses or medical emergencies.

An emergency fund can help you avoid taking on high-interest debt by providing access to funds for these unforeseen emergencies without having to take out a loan or go into credit card debt.

If you're reading this post, chances are that emergency funds have crossed your mind. What is an emergency fund? How much should I save? How long will it take me to reach my savings goal? These are all valid questions, and we'll go over them in detail below.

What is an emergency fund?

An emergency fund is a collection of savings used to provide short-term financial security in the event that an emergency arises. The purpose of an emergency fund is to cover expenses like medical bills, sudden job losses, urgent home repairs or natural disasters with funds available right away without going into debt through credit cards or loans from a financial institution. It's a safety net that provides you with a piece of mind when life throws a curve call at you!

There are many scenarios that would benefit from an emergency fund:

• You have major repairs that need to be done ASAP
• You lose your job
• You had a health emergency
• Your car needs to be repaired

In any case, it will act as a cushion available to cover these unexpected expenses.

As I've had to use my emergency fund a few times in the past, the peace-of-mind that comes with knowing you have an emergency fund available is priceless! It pays off when you really need it because your money will be available when you need it the most!

How to build an emergency fund?

It's important to understand that an emergency fund is a way for you to save money without it affecting your lifestyle. You wouldn't build an emergency fund when you barely have enough to cover your needs. Once your necessities are covered, you can start contributing to your emergency fund.

You can begin by putting in as much or as little money as you want, whenever you want.

The goal is to reach a point where you have enough funds to cover all of your monthly costs for an extended period. 3 to 6 months is usually recommended because it should give you enough time in case something unfortunate happens like losing a job or getting sick and not being able to work.

If you want to have a solid safety net, it's best to start small and work your way up. Set an automatic contribution on a regular basis like once or twice month so that the money is automatically deducted from your paycheck and deposited into a high interest savings account. This can help you get used to living without as much of this money while at the same time building up your emergency fund balance over time!

It's important that you include these contributions in your monthly budget. You can start small if you do not have to means to contribute large chunks of money right away. A few dollars here and there will slowly build up until you have the financial foundation you need for any emergency!

For example, if you can save $50 per month, you'll have $600 after a year! You can then contribute more once you have more funds available to you.

It's also important to watch your spending habits and impulse purchases, so you have enough money to build your fund.

Even if your fund isn't fully funded, it will still have your back in case of an emergency.

Is a 6 months emergency fund enough?

As you begin to build an emergency fund, you may wonder how much should be in it. Most people say that an emergency fund should be in the range of 3-6 months worth of living expenses.

While it varies from person to person, a 6 months emergency fund is generally enough for most people as it will help them cover their living expenses if their income or expenses are impacted by an unexpected event.

An emergency fund can also be used to cover a job loss or illness that prevents you from working and earning money. Having a combination of emergency and savings will ensure you have enough financial security in the event that something happens to prevent your earning ability.  

Note that an emergency fund is not a savings account with extra money to support your lifestyle or a retirement fund.

Having a 6 months emergency fund will help provide the short-term financial assistance you need and will help you avoid going into debt if something happens.

If you're unsure how many months your fund should cover, you can follow these two general guidelines:

• If you have a stable salary, you should save for at least 3 months worth of living expenses
• If your income varies from month-to-month, you should save for at least 6 months worth of living expenses

How much money should you have in your emergency fund?

The amount of money in a fund varies from person to person. There's no one size fits all since we all have different needs, income stability, support system and people to care for.

Ideally, your fund should have the amount of savings you need to cover your monthly expenses in case the worst happens. There should be enough funds available to support you while looking you are going through your expected hardships.

In order to figure out how much should be in your fund, you should first figure out how much you spend every month.

You can do this by taking a look at your past few bank statements and adding up the total amount of money going in and coming out on average every month.

Once you've found your average monthly expenses, multiply it by the number of months for which you'd like to be covered. Now you have your emergency fund goal, and you can begin to save money to build your own fund!

Where you should keep your emergency fund

Your emergency fund should be easily accessible. Putting any amount into a savings account will have you paying no interest at all and protected from an unexpected market downfall.

It should contain cash and not stocks or real estate. This is because it is used for short-term financial emergencies and market fluctuations can make your money worth much less than the initial investment if it's withdrawn too early, and it would take too long for you to retrieve funds from your real estate investments.

In general, these require more time and money which are both needed in an emergency situation.

Protecting your emergency fund may be the most important investment you make. If, unfortunately, a sudden expense arises, and it's not available to you at that moment in time, what will happen? Your life could come crashing down from one unplanned event. All of those plans for retirement or even just getting by each day suddenly are no longer possible due to this single financial mishap which can now turn into a snowball effect.

A high-interest savings account is a good place to store your emergency savings because you won't need to worry about withdrawal restrictions and your emergency savings are protected from a market downfall.

The Takeaway

Building emergency savings is a crucial step in managing your finances. It can make you feel empowered and more confident, because it gives you the peace of mind that no matter what happens, with one plan to rely on - whether an accident or illness strikes - you are prepared for anything life throws your way. Again, having one provides you with a peace-of-mind that you will be financially and emotionally able to go through any emergency.

You can't predict when an emergency will arise, but you can prepare for it. After all, it's not a matter of if, but when it will happen. The question is, will you be prepared for it?