Personal finance experts don’t always agree on how you should spend your money, but there is one thing they can all get behind: Having an Emergency Fund.
An emergency fund (also called a rainy day fund or fall back fund), is a stash of accessible money that you set aside for unplanned expenses. Building up an emergency fund is an important step toward financial stability, that allows you to cover small, unplanned life events without going into debt. While it sounds like a good idea for everyone to have a financial safety net like this, according to the 2018 National Financial Capacity Study, 46% of Americans don’t have any emergency savings.
How much should you have in your emergency fund? The actual amount may vary depending on who you ask. You’ve probably heard $1,000 thrown around as a good target amount. But with the rising costs of, well, everything, even $1,000 might not be enough to cover you in the event of a true emergency - like if you lose your job, have to go to the emergency room, or your pet needs emergency surgery.
That’s why many financial experts recommend that your emergency fund covers 3-6 months’ worth of expenses (like housing, food, utilities, healthcare, transport, and debt).
If you know how much your monthly expenses are costing you (here’s a guide to help you figure that out), multiply that number by 3-6 to figure out how much you’ll want to set aside for your Emergency Fund.
Why you need an emergency fund.
Think about what you would have to do to cover an unplanned $1,000 expense right now - because of job loss, unexpected car repairs, or some other reason. Would you have the money to cover it in your checking account, or would you have to come up with it some other way?
You might consider putting it on a credit card, and just trying to pay it off as quickly as possible. Or you could ask a family member or friend for a short term loan.
If you would have to put it on a credit card, how soon would you be able to pay it off? Would you have to hold off on paying other bills - like debt repayments - in order to pay it off quickly? If you don’t pay it off quickly - how much extra will you have to pay in interest on that balance until you can?
You can probably see why, from a purely financial standpoint, having an emergency fund would be helpful. Having extra cash set aside to cover unexpected expenses means you won’t have to derail your other financial plans in order to make it work. To put it another way, it means that your unfortunate event won’t turn into a series of unfortunate events.
There are two other invaluable reasons that you need an emergency fund: Peace of mind, and flexibility.
Two more reasons why you need an Emergency Fund.
Why #1: Peace of mind
You probably don’t plan on getting a flat tire or experiencing a medical emergency anytime soon (knock on wood). Most people don’t: That’s why these expenses are called unplanned, and why it’s so easy for them to derail your financial progress!
Having an emergency fund gives you peace of mind: That if (really, when) unplanned expenses arise, you’re prepared to take care of them. If you have an emergency fund, an unexpected $1,000 bill still sucks - but at least you don’t have to worry about where the money will come from.
Building up an emergency fund now is a way to make a future difficult situation, just a little easier. If your car breaks down, you lose your job, or you have a leaky roof, you’ll feel a lot better knowing that you have money set aside just for this reason (and that you won’t have to go into debt, slow down your debt repayment, or dip into your Savings Goals to pay for it).
Why #2: Options
Second, building up some emergency savings gives you options when unexpected things happen. For example, imagine that you’re suddenly laid off from your job, with no warning. If you have emergency savings, you can take a little time to figure out your next step, without the pressure of next month’s rent looming over you.
If you haven’t been saving, you’ll feel much more pressure to find another job, quickly - even if that means taking a lower-paying job, or one you don’t actually enjoy.
For another example: Imagine that the sweet puppy you rescued from the shelter has started showing signs of pain in his legs. You take him to the vet and learn that he will need surgery to help him live a pain-free life. Having some emergency savings will give you the option of funding his surgery without going into crippling debt.
How to build your Emergency Fund.
Of course, saving 3-6 months’ living expenses is no small feat. It won’t happen overnight. In fact, you’re better off getting into the habit of saving a little bit every day, than trying to fund your emergency fund in large chunks.
With a Simple account, you have access to several awesome (if we do say so ourselves!) tools to make it easier to set up and build your emergency fund. Check out our Ultimate Emergency Fund Guide to learn more!
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