There are times when life may throw some unexpected circumstances or events at you. Such events could be in the form of medical emergencies, job loss, unexpected emergency expenses, emergency repairs at home or even unexpected family loans. When such incidents occur, there is always a need to raise cash quickly to solve them especially when it is a medical emergency. This is where the need for an emergency fund comes in.
What is an Emergency Fund
An emergency fund is a sum of money, set aside regularly to handle unexpected events or emergencies. It is money set that is used to handle unplanned expenses. Any expense or spending that is planned does not fall under the category of an emergency. For instance, a fund for your child’s college does not fall into the category of emergency needs. An emergency fund does not necessarily have to be a lump sum as most people think. It can be a smaller amount. It is best to have a smaller emergency fund than to have none at all.
Reasons You Need to Have an Emergency Fund
There are a lot of benefits you stand to gain by having an emergency fund. Although the impulse to spend the entire money you make may be strong, but these reasons would help you developed self-discipline to start an emergency fund today:
a. Helps You Keep Track of Your Expenses: You can go a long way to keep track of your expenses by starting an emergency fund. You will not have to use money for other expenses to solve an emergency when you have an emergency fund. With that, you can keep track of the monthly expenses.
b. Helps You Achieve Your Financial Goals: If you intend to save up money to achieve a big financial goal, then it is better to have an emergency. With an emergency fund, you don’t necessarily have to dig into your savings for bigger projects. In other words, an emergency fund helps you achieve bigger financial goals easily.
c. Keeps Stress Level Low: You are bound to be stressed when you are faced with an emergency and no cash right always to solve it. Emergency funds help you prevent financial stress that comes with emergencies.
How Much Should You Have in an Emergency Fund
There is no laid down rule as to the necessary amount to have in an emergency fund. But most financial advisors are of the view that it is best to have an amount to cover your expenses for at least six months in your emergency funds. That doesn’t mean you have to generate such amount and start the funds at once. You can start small and grow the amount over time. For starters, you can budget 5% of your earnings into an emergency fund.
Where to Put Emergency Fund
Where you place your emergency funds matters. You don’t want to place your emergency funds in a checking account you use for paying your weekly bills. You can put your emergency fund account in any of the following
a. Money Market Funds: Money market fund is a short term investment option that pays you interest to leave a certain amount of money in your account for a specified period of time.
b. High Yield Savings Account: This is a form of savings account that pays interest to save money. Most banks offer this type of savings account
The reason you should put your emergency funds in a high yield savings account or a money market fund is because both accounts are highly liquid. This means that you can easily convert your money to cash when needed. Also, you earn interest for leaving your money in such accounts. Finally, you money is insured up to $250,000 by FDIC if you use a savings account.
How to Start an Emergency Fund
The process of starting an emergency fund is very easy. All you need is to follow the steps below.
Step 1: Create a Budget
The first step towards achieving any financial milestone is to have a budget. In your budget, include a category for an emergency fund. As mentioned earlier, you can start with 5% of your earnings and grow it with time. Check this post on how to Create a Budget
Step 2: Create an Account
Secondly, you make a choice of an account to place you emergency funds.
Step 3: Save Diligently
You need to have a goal on the amount you want to have in your emergency funds and the timeframe to achieve that. This will give you an idea of the amount to pay into the account timeously. Once you determine that, make an effort to put the money into your emergency funds account diligently.
Step 4: Self-Discipline
You need self-discipline to ensure that you don’t spend the money in your emergency fund account on other minor expenses.