The Importance of an Emergency Fund
There comes a time in everybodies life, where income seems to dry up, stockpiles seem to deplete quickly, and we look at ourselves in the mirror and wonder why we didn’t save for an emergency such as this.
Job loss
Pipe broke in house
Heater stopped working
Car broke down in rush hour
Medical bill hit you out of nowhere
All things that can, and if your aren’t prepared, will happen and wreck havoc on your financial journey.
This is why your need an Emergency Fund.
So what is an Emergency fund?
An emergency fund is simply, a set aside pile of money, used to help pay off any unexpected expense that may arise. It ends up being a bit more expected if you have an emergency fund. Emergency funds are meant to be the lower barrier in your financial journey.
They are one of the first things you should be building, starting at $1,000 and move up to 3–6 months of expenses. You will find that building an emergency fund will be beneficial to your financial life as it provides a cushion to saving for other needs as well as investing.
Why you need an emergency fund-
There may be a reason you should invest and have your money grow, but there is more importantly a reason to save up a nest egg before you deeply invest. Falling into a rut where you are no longer getting a good income or finding a way to pay your bottom line expenses is why you need a emergency fund.
There are times where you will find you are unable to pay a bill that is essential. (not buy an apple watch, or go out to eat at a fancy restaurant.) This is why you will be happy to have your emergency fund.
How to build your Emergency fund-
Looking into your finances, and finding out you need an emergency fund? Here is a tip that can help.
Cut your expenses, save the money you don’t spend on a fund that will offer you emergency savings. You can add this amount to your savings account weekly or offer it to the account monthly.
Another neat way you can save up your emergency fund is doing the 3 step method.
- Save $1,000 towards your E fund
- Save 3–6 months towards your E fund
- Save 12 months towards your E fund
You can calculate your E fund months by taking all essential purchases for the month and using that number. This will be Rent, utilities, basic food, (no steak dinners), bills, cut out subscriptions, cut out discretionary spending.
The point of living on your E fund is to be a very tight space. You do not want to spend all your emergency fund.
Saving for this is easier than saving for lifestyle spending. You need only save for the bare bones budget. If you can live on $850 a month in bare bones budget, 3–6 months will be $2,550–5,100. And your final savings goal will be $10,200 for your Emergency fund.
To update this, you will revisit a barebones budget yearly and see that maybe a few years down the line, with rising prices, different lifestyles and some extra dependents, you may need $1,700 a month in a bare bone budget. You already have your $10,200. (perfect enough that is already 6 months) now you just need to save another $10,200 to reach your new goal.
More resources-
You can find more emergency fund content and resources over at The Little Dollar as well as checking out this post here.
How to build an Emergency Fund
As well as check out a good bank account you can store your Emergency fund in apart from your Checking account.
