The Importance Of An Emergency Fund

There are two types of people in this world: those who keep an emergency fund, and those who don’t. Those who don’t will find that, as soon as something costly comes along, they’re put in a financially sticky situation, and they kick themselves for not keeping money aside especially for this use. Those who do keep an emergency fund are comfortable and aware that one day, something might come along and cost them a lot, but it won’t put them in dire financial straits. If you’re a member of the group who has no fund, here’s everything you need to know to get you started.

The what, where, and why

An emergency fund is a small pot of money, usually between $1000 and $5000, kept to one side for critical expenses. It’s useful to put it into a savings account, preferably one with a good interest rate, but one which you can access without a notice period. This is because you may need the money at the drop of a hat. Hopefully, it can just sit there, gaining interest happily for a few years, but you’re guaranteed to sleep better at night knowing that it’s there. Once it’s there, you know that if you lost your job, you’d still be able to live comfortably while searching for another, or you will be able to afford a new furnace in midwinter or a new AC system in midsummer at the drop of a hat.

Deciding on an amount

The amount you choose to put away will depend on a variety of factors. It’s usually recommended that you have around three months worth of salary in there, which would mean that, if you were to lose your job, you could survive comfortably for three months. But there’s more to it than that. If you have a family to support you may want to consider increasing the savings, so if something does go wrong and you’re also out of work, you have a bit more flexibility. So a good way to work this out is to tally up all your living expenses. This should include your rent or mortgage payments, insurance, vehicle or transportation costs, utilities, and groceries for your entire household. Multiply this figure by three, and you’ve got a good, stable amount to aim for.

Knowing when to use it

When you have a growing pot of money to your name, it can be tempting to use this to buy a new car, pay for a vacation, pay off any debts, or use it as a down payment for a new home, but that is not what this money is for. If you want a fund for those sorts of things, set up a separate savings account, and pay into it each month. The emergency account is to do just what it says on the tin: pay expenses in an emergency. This could be urgent medical care which is not covered by your insurance; it could be a plane ticket to visit critically ill family members, a new boiler, natural disaster relief, or urgent veterinary care. It can also cover utility and tax bills that were unexpected, but only at a push. But most importantly, it’s there for when you have no other option. It is the difference between putting yourself in significant debt, or on the street, or keeping yourself comfortable through adversity. The truth of the matter is, you should be avoiding spending this money unless you absolutely have to. The longer it sits in your savings account, gathering dust (and interest), the better the position you’re in.

Keeping backup plans in mind

Sometimes costs will exceed your emergency fund, and you’ll need access to money immediately for far larger emergencies. Loans such as an esign payday loan can get you this money almost immediately, but to save yourself from descending into a spiral of debt, a repayment plan needs to be created straight away as the repayments and interest can be significant. These sorts of loans, like your emergency fund, should only be used if you absolutely must. They’re not for paying for vacations, home renovations, or shopping trips, and they’re certainly not for paying off other debts. If you must use a payday loan, make sure it’s a proper emergency. Because sometimes things happen which will be completely unexpected, and even the most conscientious saver with the most thought-through emergency fund can be taken by surprise. So at this point, it’s always worth keeping a few backup plans in mind.

Sticking to goals

Paying into an emergency fund is an extra expenditure which needs accounting for in your monthly budget. Setting up an automated deposit scheme, whereby each month, following your paycheck, your bank automatically transfers the agreed amount into your savings account can significantly speed up this system. It also makes it far less likely that you’ll forget, or decide to pass on savings this month. When you decide on your emergency fund amount, make the decision how much to pay into it each month, and decide when you’d like to reach your target by. Just deciding to put a bit aside each month isn’t so good for your motivation. Once you’ve reached your target, simply divert the money into each month into a different savings account – that can be your Rainy Day Fund. After all, once you’re used to your disposable income decreasing by a certain amount, you may as well make the most of that extra cash. It can be tricky to push yourself into saving, which is why it’s so important to automate that system. And once you see the money piling up in your emergency and rainy day funds, the sense of satisfaction will make it totally worth it.

An emergency fund isn’t for tickets to Disneyland, a fancy new car, or a down payment on a house; it’s worth so much more than that. It’s the pot of money that helps you sleep at night, safe in the knowledge that if something happened to your job or your health, or of any of your family members, you could still afford to be healthy, safe, and comfortable. While it might take a few sacrifices in disposable income to build up, it’s totally worth it.

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