Why You Need An Emergency Fund And How Much Is Enough
August 8, 2022
Most people know they need to have an emergency fund. But many don’t know how much money they should have in their emergency fund.
Some don’t understand why they need an emergency fund in the first place.
This blog post will discuss how much you should have in your emergency fund and why having one is so important.
What Is An Emergency Fund?
An emergency fund is a savings account you set aside for unexpected expenses.
As it caters to emergencies, it should be easily accessible so you can withdraw the money quickly when needed.
An emergency fund is essential because it enables you to pay for unexpected costs without going into debt.
Why Do You Need An Emergency Fund?
There are various reasons as to why you need an emergency fund. These include:
You Are New To Financial Planning
When you first start budgeting, it can be challenging to stick to your plan because unexpected costs can come up.
An emergency fund can help you pay for these unforeseen costs without putting you in debt. This will help you to stick to your budget and reach your financial goals.
You Only Have One Source Of Income
If this is the case, an emergency fund can help you pay for unexpected costs because the fund can cover expenses you may not be able to pay off immediately with only one income source.
Therefore, you can avoid going into debt or maxing out your credit card.
You Are Self-Employed
If you are your own boss, an emergency fund can cover sudden expenses you may incur in your business that you may not be able to pay off instantly. This will keep you from going into debt while running your business or firm.
You Have Medical Issues
Suppose you or a family member has health problems. In that case, an emergency fund can help you pay for such costs because it can cover such expenses that you may not be able to pay at the time of the emergency.
The fund will enable you to go to get medical treatment or help immediately so you can recover and resume your duties sooner.
You’re Saving Up For a Goal
If you’re saving up for a specific goal, like a downpayment on a house or a new car, an emergency fund can help you reach your goal by enabling you to pay for an emergency.
This means you can resume saving for your goal without having to worry about sudden costs you need to fork out money for.
How Much Money Should You Set Aside For Your Emergency Fund?
You should set aside at least three to six months’ living expenses in your emergency fund. It will help you cover costs that may come up suddenly, like a medical bill or vehicle repair.
Of course, figuring out how much money you should have in your emergency fund will depend on your circumstances. If you have a family or are self-employed, you may want to set aside more money.
If you have little or no debt and live with your family, you may get by with less money in your emergency fund. You can use a personal loan calculator to help you determine how much money you should set aside for your emergency fund.
How Can I Build My Emergency Fund?
There are many ways you can build your emergency fund. Here are some ways:
Multiply Your Income Sources
One of the best ways to build your emergency fund is to have more than one income source. If one income source dries up, you will still have other sources of income to fall back on.
You can multiply your income sources in the following ways;
- Get a part-time job in addition to your full-time job.
- Invest in a rental property and earn income from rent.
- Start a side hustle and earn extra income.
Invest In Valuable Assets
Invest in assets that will appreciate over time, like stocks, bonds, and real estate. These assets will provide you with income and grow in value over time. Therefore, you can build your emergency fund while also increasing your wealth.
Eliminate Short-Term Debts
You can build your emergency fund by eliminating short-term debt such as credit card debt and car loans. This will free up more money for your emergency fund monthly.
You can eliminate short-term debts by:
- Making a budget and sticking to it
- Cutting back on your expenses
- Increasing your income
Track Your Expenses
You can also build your emergency fund by tracking your expenses. Doing so enables you to know where your money goes each month and adjust accordingly.
There are a few ways you can track your expenses:
- Use a budgeting app like Mint, or You Need A Budget (YNAB)
- Track your costs manually with a pen and paper
- Use a spreadsheet to track your expenses
How Should I Manage My Emergency Fund?
There are different ways you can manage your emergency fund. They include:
Keep Your Emergency Fund In A Savings Account
One of the best ways to manage your emergency fund is to keep it in a savings account. That way, you can earn interest on your money and easily access it if you need it.
Here are some types of savings accounts you can choose from:
- High-yield savings accounts offer a higher interest rate than traditional savings accounts.
- Money market accounts offer a higher interest rate than high-yield savings accounts and provide you with check-writing privileges.
- Certificate of deposit (CD) accounts offer a fixed interest rate for a set period.
Invest Your Emergency Fund
It can enable you to grow your money while still having access to it if you need it. Here are various ways you can invest your emergency fund:
- Exchange-Traded Funds (ETFs): These are a type of investment that allows you to invest in various securities, but they trade like stocks on an exchange.
- Index funds: This type of investment tracks a particular index, such as the S&P 500.
- Mutual funds: These investments allow you to pool your money with other investors and invest in various securities.
Use A Combination Of Both Saving And Investing
Another way to manage your emergency fund is to use a combination of both savings and investing. Therefore, you can earn interest on your money while also growing your wealth.
You can do this by keeping some of your emergency funds in a savings account and investing the rest.
5 Real-Life Situations That You Will Need Your Emergency Fund
Here are five real-life situations where you will need your emergency fund:
- If you lose your job: Losing your job is an actual emergency. If you don’t have an emergency fund, you may have to rely on credit cards or loans to cover your living expenses.
- If you have a medical emergency: Medical emergencies can be expensive. If you don’t have health insurance or enough coverage, you will need to use your emergency fund to pay your medical bills.
- If your car breaks down: If your car breaks down and you don’t have emergency savings, you may have to put the repairs on a credit card.
- If you have a home crisis: Home emergencies such as a burst pipe or faulty water heater can be expensive to repair. If you don’t have emergency savings, you may have to put the repairs on a credit card.
- If you need to move: It can be expensive if you need to move unexpectedly. You may have to put the cost of driving on a credit card if you have no funds to tide you over.
Frequently Asked Questions
Where Should I Keep My Emergency Fund?
There are different ways you can manage your emergency fund. You can keep it in a savings account, invest it, or use a combination of both. It depends on your circumstances.
What Should I Do If I Don’t Have An Emergency Fund?
If you don’t have an emergency fund, start setting aside some money each month. You can also find ways to make your money work, such as investing it.
An emergency fund is a vital part of your financial security. It can help you cover unexpected expenses and keep you from debt. Start by setting aside some money each month and keep it in a safe place where you can access it if you need it.
But if you need a loan now, apply for an Urgent Emergency Loan with Credit Thirty3 or talk to our loan advisors now.