Emergency Funds: Why You Need One and How to Build It Step-by-Step
Let’s be real—life loves a plot twist. Emergencies can strike at the worst possible times. And when they do, they hit your finances hard. That’s why you need an emergency fund. Today, we’re going to break down what an emergency fund is, why it matters, and exactly how to build one without feeling overwhelmed.
What Is an Emergency Fund?
An emergency fund is money set aside to pay for large, unexpected expenses such as:
- Medical bills
- Car repairs
- Home repairs
- Losing your job
The money is usually kept in an easily accessible place, like a savings account.
How Much Should You Save?
Everyone’s circumstances are different. Our overall message is any emergency fund is better than none. In a dream scenario, you should save anywhere from 3 – 6 months’ worth of living expenses.
How To Build an Emergency Fund Step-By-Step
- Know Your Goal
Work out how much you, and your dependents, need to survive each month. You may want to consider:
- Rent/ mortgage
- Food
- Transport
- Bills
- Loan payments
Why Do You Need an Emergency Fund?
Let’s imagine that you’re faced with a financial emergency, but don’t have an emergency fund. How do you cope?
- You use your credit card – but now you’re saddled with high-interest debt that’s difficult to pay off and which can negatively affect your credit score
- You try to get a loan – but approval takes time and you need the money now. Since you’re desperate, chances are you won’t be able to shop around for the best terms and, even with a good loan, you’re still stuck paying interest.
- You use other savings, such as your retirement savings – but now you’ve hurt your future self. Also, you may not have enough savings to cover your emergency.
- You’re unable to pay – so now you can’t get the help you need. Depending on the situation, you may be seriously damaging your health, ruining your property, or losing your home.
An emergency fund helps prevent these nightmare scenarios. Also, if you need an emergency fund, chances are you’re already in a high-stress situation. Knowing that you don’t also need to worry about money gives you more peace of mind.
Open a Separate Account
DO NOT keep your emergency reserves in your everyday bank account; you don’t want to be tempted to dip into your fund for non-emergencies! Instead, keep the money out of sight but within easy reach.
Start Saving
Let’s say you plan to save $30,000. Don’t let the large amount scare you. Work out how much you can put aside each month. They key is consistency. Small amounts add up over time.
Pro tip: Treat your emergency fund like a bill you must pay and set up automatic bank transfers.
Cut Costs & Redirect Savings
This might be a good time to ask: has your lifestyle become too extravagant? Can you reduce expenses and redirect that money to your emergency fund? You may even choose to cut nonessential spending for a couple months so that you can jumpstart your emergency savings.
Rebuild After You Use It
Did you need to dip into your emergency fund? That’s why it’s there! However, when it becomes financially possible, remember to top it up so that your financial safety net will be restored.
Final Thoughts
You can never predict when an emergency will strike. But you can ensure that you and your family are financially prepared. Don’t put off saving. Start today – even if you have to start small – and take care of future you.
