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Emergency Fund: Why you need one and how to build it

  "The information provided on this blog is for general informational purposes only. It is not intended as professional financial advice. Please consult a professional before making any major financial decisions".

What is an emergency fund?
An emergency fund is money set aside for unexpected things that may come up out of nowhere, like repairs, medical bills, or if you lose your job. It's money you can use when life isn't going your way. 

Why is an emergency fund so important?
Having an emergency fund is a great way to avoid taking on debt or taking money away from other goals, such as retirement. Avoid taking out money from your retirement, as that will set your financial goals back. 

Bankrate's emergency savings survey found that: 

  • Nealy 60% of Americans are uncomfortable with their level of savings. 
  • 27% of Americans wouldn't be able to cover a month's expenses if they lost their job tomorrow. 

How much should an emergency fund be?
The general rule is an emergency fund should be enough to cover anywhere from 3 to 6 months of expenses. This amount will vary depending on how much you earn/spend. If you have dependents or a family to support, it would be best to save more. 

How do I build an emergency fund?
There are many different ways to build an emergency fund. Here are a few ways to build one: 

1. Set a goal: 
Having a certain estimate in mind will help you reach your goal. Find out how long it will take you to reach that goal.

2. Open a savings account:
You can open a high-yield savings account and keep your money there. The benefits of that are you can get about 5% interest on your money risk-free. However, make sure you can access that account whenever you need.

3. Consistency: 
Start contributing a certain amount each week/month. The more the better but every little counts.

4. Budget: 
See where you can cut down on expenses and save more. View my Budgeting 101 guide on how to set and stick to a budget. 

5. Monitor it: 
If you happen to have an emergency, make a plan to fill up the emergency fund. Secondly, make sure to keep an eye on your expenses and adjust your emergency fund accordingly. 

Bottom Line:
An emergency fund is essential for financial security. Set 3 - 6 months of expenses in an easily accessible account. Having this safety net helps you avoid debt and gives you peace of mind. Start small and build up your fund over time, Good Luck.



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