Building An Emergency Fund: Why You Need One & How To Fund It

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Your car breaks down, you lose your job, your water heater breaks, you can't find a job as quickly as you planned, you need to buy an emergency plane ticket. Life happens and you can't predict when or how surprises will arrive. This is where your emergency fund comes in.

"Having an emergency fund  is essential and should be part of everyone's overall financial plans."

So what is an emergency fund and why is it important?

As the name indicates, your emergency fund, emergency savings is to help you weather unplanned life circumstances, emergencies or major upcoming expenses. Having a stash of cash to fall back on when "life happens" means you won't have to rely on credit or rack up debt in order to resolve your situation.

It's the difference between having your car break down and leveraging cash you had already put aside for this exact purpose versus maxing out a credit card and figuring out how to pay for it later.

The latter scenario means an additional or higher credit card payment, more debt, and more money woes to worry about. And more importantly, you are now further away from your financial goals. This can be a major demotivator.

So think of your emergency fund as a form of insurance. Your own self created insurance with its main focus being to help you keep your financial goals intact.

- Wondering how an emergency fund is different from a sinking fund? While your emergency fund acts as money to bail you out of unplanned life circumstances, a sinking fund is typically used for planned upcoming one time or irregular expenses like car maintenance or home repair for example.

How much emergency fund savings should you have?

Ideally, your goal should be to have 3-6 months of your essential living expenses in emergency savings. But before you think this is unattainable, it's important to know that this is referring to your "basic living expenses". Essentially, how much do you need at a minimum to pay for your housing, transportation, and food? It that number sounding more attainable?

The thing is, when everything is nice and rosy in our lives, we tend to inflate our living costs. However, your emergency savings really focuses on your must-haves which are essential to your life.

Keep in mind that, your emergency fund might need to be broader than just your basic living expenses. It's all about recognizing what might come up and accommodating for that as you build your fund up.

For instance, if you are driving a 10-year-old car, it's more than likely going to need a major repair soon. So you'll want to build the cost of that repair into your savings plan. Similarly, if you own a home and your roof is 20 years old then you'll want to start saving for a roof replacement. This way, what could potentially be emergencies are now mere inconveniences.

That being said, a good first milestone to set is to save $1,000. This can cover most basic emergencies and is a good amount to have if you need to focus on other pressing financial goals like paying down high-interest debt.

How much should I have in emergency savings if I'm single vs. if I'm married?

If you are single, the more you have saved the better, so setting a goal of at least 6 months would be wise. This is simply because as a single person, you might not have anyone else to fall back on for financial support.

If you are married or in a relationship where you have a second income to fall back on, then you can start with 3 months as a goal and raise it 6 months once you reach 3 months of savings.

3 months because there are two incomes and it is less likely that you would both be out of a job for the same amount of time, for example. However I will stress, the more you can save for emergencies, the better.  12 months would be amazing!

So how do you save that much money for emergencies?

Putting away 3 to 6 months of income for emergencies sounds like a lot but if you start with saving a little then you can save over time until you eventually reach your goal. The key here is to build your savings into your budget until you reach your emergency fund goal.

Remember, the amount of money you are saving is to cover 3 to 6 months of your basic living expenses so your housing, your food and your transportation NOT your non-essentials and nice to have.

If an emergency comes up, you should leverage your emergency fund and then plan to replenish it later. The best way to save and meet your emergency fund goal is to include a category for emergency savings as part of your monthly budget. You can set up this amount to automatically get transferred to an account set up strictly for your emergency savings.

Include contributing to your emergency savings as part of your monthly budget.

Where should you keep your emergency savings?

Your emergency fund should be easily accessible and liquid. This way you can get to it when you need it without having to wait or take a liquidation hit. Keeping that in mind, don't tie your savings up in the stock market or in real estate. An interest-bearing savings account or a certificate of deposit are good places to store your emergency money.

Tempted to spend your emergency savings? Consider setting up automatic deposits to a bank account at a different bank not connected to your main checking account. Also, skip the checks and debit card. Make it as easy as possible to avoid temptation.

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Having an emergency fund is essential and should be part of everyone's overall financial plans. The last thing you want is to be set back financially by not being prepared to handle things when life happens.

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