The Importance of having an Emergency Fund
In life you should always expect the unexpected. That’s why any financial guru around will stress the importance of having an emergency fund. If you’re confused about what exactly an emergency fund should be used for, I can tell you this: It’s not for that 65-inch TV you’ve been eyeing when yours bites the dust. While that may seem like a catastrophic event to some, it’s not exactly the type of crisis that you’ll want to dip your fingers into your cash stash for.
An emergency fund, also known as a “rainy day” fund, is the money you save for those unforeseen circumstances you run into in life. Your budget is made up of everyday expenses like groceries, housing, cars, etc. Your emergency fund is for those things you don’t anticipate in your budget. So when life happens, and it will, you need to have money somewhere that you can easily access to cover those expenses. This is not money you tie up in an investment. You’ve got to keep it liquid and available. You don’t want to count on credit cards or debt to get you through when your car breaks down or the air conditioning goes out in the middle of August. That’s why having a cash stash to cover these is vital to your financial health.
How Much should You have in Your Emergency Fund?
The basic rule of thumb when it comes to this type of savings is to have three to six months of living expenses readily available. For a one-income family, we suggest six months. That means if you make $100,000 a year and your monthly expenses are $5,500, you’re going to want to set aside $33,000. If there are two breadwinners, we recommend three months because it’s unlikely both income earners will hit a bump in the road at exactly the same moment. Keep in mind it’s based off your monthly expenses and the cash needs to be readily available. (For related reading,
What to Use Your Emergency Fund for
Here are some of the reasons and expenses you might need to tap your fund for:
- Car troubles
- Medical emergency
- Job loss
- Unexpected home repairs
However, some people aren’t big on keep that much cash. If you’re one of them, then at least set a certain amount aside as your emergency fund. For example, you might be comfortable with keeping $5,000 in cash , which would cover most of your anticipated calamities because your cars and home are in good shape.
The amount isn’t the most important factor. The key is in establishing the reserves for those unpredictable moments and making sure it’s enough to keep you from borrowing money as a quick fix. Without it, you’ll undoubtedly end up in debt, and debt is really just a crutch for those who don’t know how to budget. So budget budget budget! If you are budgeting properly, then you’ll be fine. Just remember to always put enough money back into a cash position so that you’ll be able to handle whatever life throws at you.