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I truly believe that you need an emergency fund. Not just you, but everybody!
An emergency fund is cash that you’ve put aside with the intention of helping you keep your normal life when an emergency in life shows up.
When you have nothing saved, any unexpected expense becomes an emergency that has to be paid with your credit card (and everybody knows what happens with credit card debt!).
Don’t get me wrong, credit cards can be great if used in the right way (I get a lot of travel rewards with mine and I don’t pay a dime!). But if you use your credit card because you really need the money, be aware that when you pay the money back to the bank, in most cases you will also pay a commission.
To avoid unnecessary fees, you should build an emergency fund. Have I said this before? Yes! You NEED an emergency fund!
In my previous post How To Become Debt-Free in Less than a Year, I talked about how you should pay off your debt (and never go into debt again).
In a recent article from CNBC, it was published that around 57 million Americans have no emergency savings (that’s 24% of the total US population!).
It’s a scary feeling thinking about families that don’t have an emergency fund.
If you have an emergency fund and any emergency pops up in your life, you will be covered. Plus, building an emergency fund can help a person get through many difficulties in life.
Why do you need an emergency fund?
There are many reasons why you may need your emergency savings. Some examples that come to my mind are:
- It can help you pay your bills if you lose your job. Your job may be great, but you never know what could happen in the future. Historically, even great companies have gone into bankruptcy within months. It’s a fact, it could happen to yours too. Fortunately, many companies are required to provide 30 days of notice before you leave the company (and stop being paid) and compensation packages.
- It can help you pay unexpected medical bills. If you have a basic health insurance or you don’t have it, then having an emergency fund will give you peace of mind.
- It can help you pay for car repairs. I know this is the last thing you want but breakdowns happen and they are not cheap to repair.
- It can help you pay for vet bills if your pets get sick.
- It can help you pay for flights to visit relatives who are ill or in a critical situation.
- It can help you pay home repairs (such as leaks, fix the hot water heater, or when an appliance breaks down).
- It can help you pay for anything you can think of that is unexpected and required (something that affects your health or ability to earn money).
One of the best reasons to have an emergency fund is the fact that you will never get into debt. Paying debt means losing money, and I’m pretty sure you don’t want to lose money 🙂
Side note: An emergency fund is not to spend in treats. It’s only to be used for emergencies! If you want to spend it on a trip, you should create separate savings for it. It is very important to draw a line between savings for emergencies and savings for anything else.
How much should you put into your emergency fund?
By now you may be wondering, “How big should my emergency fund be?”. There is no exact answer as it depends on your family’s financial circumstances and living expenses.
As a general rule, I recommend you to save at least 3 months worth of living expenses. So if you lose your job, you can support your family until you get a new one.
In our case, our living expenses are around $3,600/month (yes, I know it’s a lot, but Cambridge is expensive!). Our emergency fund is three times that amount, $10,800. It could have been half of it ($5,400) because both my wife and I are working and it’s very unlikely that we will both lose our jobs at the same time. But to be on the safe side, we prefer to save the full amount.
But don’t be scared! You don’t need to save that much money. For example, if your living expenses are $500, then you only need $1,500 which sounds more affordable.
If your income is tight and you can’t save much money, then try to squeeze even a little bit in your emergency fund – having $300 in the bank is better than nothing, plus each dollar put aside will help ease your stress when something unexpected arises.
Related article: 9 Reasons Why You Can’t Save Money Every Month
Where do you put your emergency fund?
You need quick access to your cash (emergencies can surprise you any time).
No, you don’t need it in your pocket! A basic savings account will be fine. Your money will be safe and you’ll be able to withdraw from it without any problem.
Keep it as a separate savings account, so you don’t mix it with other savings.
Building an emergency fund can help you get through difficult times in your life. It can mean the difference between your family’s financial success and failure.
If you feel like creating an emergency fund is a sort of punishment, try looking at it this way: having an emergency fund means that you have room to breathe. Instead of panicking if you lose your job, you will have time to find solutions before you run out of money.
My wife and I have already used our emergency fund twice, and even though it’s not a good feeling going through an emergency, it’s a relief to have cash saved for it.
Don’t forget that every time you use your emergency fund for any emergency, you should top it up again!
If you don’t have an emergency fund yet, my recommendation is for you to start it as soon as possible. You can use my emergency fund worksheet to help you calculate how much you should save for it.
If you want to know more about how to start building an emergency fund, have a look at my last article: How to start building an emergency fund.
Do you already have an emergency fund? How many months of living expenses did you save?