As a money coach I always recommend building an emergency fund as the first step in managing your finances. An emergency fund is a pool of money set aside specifically for unexpected expenses or income interruptions. It’s a financial safety net that can help you weather any financial storm that comes your way. Why is an emergency fund so important?
It helps you avoid debt: When unexpected expenses come up, many people turn to credit cards or loans to cover the cost. This can quickly lead to debt, which can be difficult to pay off. An emergency fund can help you avoid debt by providing you with the cash you need to cover unexpected expenses.
It protects your other savings: Without an emergency fund, you may be tempted to dip into your other savings, such as your retirement fund or investment portfolio, to cover unexpected expenses. This can be detrimental to your long-term financial goals. An emergency fund can protect your other savings by providing you with a separate pool of money to cover unexpected expenses.
It helps you prepare for the unexpected: Life is unpredictable, and unexpected expenses can arise at any time. Having an emergency fund can help you prepare for the unexpected and give you the financial flexibility you need to navigate any challenges that come your way.
How much should you save?
I recommend having at least three to six months’ worth of living expenses saved in your emergency fund. This should be enough to cover most unexpected expenses or income interruptions. However, some people may feel more comfortable with a larger emergency fund, such as 12 months’ worth of living expenses.
It’s important to keep in mind that your emergency fund should be based on your individual circumstances. For example, if you have dependents or work in an industry with a higher risk of job loss, you may need to save more.
Where should you keep your emergency fund?
It’s important to keep your emergency fund in an account that you can easily access in case of an emergency. A regular savings account is a great option because it’s easy to use and low-risk. Another option is a savings account with a higher interest rate, which can help your emergency fund grow over time. Just make sure you choose an account that’s easily accessible and doesn’t come with any fees or penalties for withdrawals.
How can you build your emergency fund?
Building an emergency fund takes time and dedication. Here are some tips to help you get started:
- Set a savings goal – Determine how much you need to save and set a savings goal. This will help keep you motivated and focused.
- Create a budget – Review your monthly expenses and identify areas where you can cut back to save more money.
- Make saving automatic – Set up automatic transfers from your checking account to your emergency fund on a regular basis.
- Use windfalls – If you receive a tax refund or bonus at work, use a portion of it to boost your emergency fund.
- Avoid using your emergency fund for non-emergencies – Only use your emergency fund for true emergencies, such as unexpected medical bills or job loss.
A high percentage of people don’t have an emergency fund, and this can be very dangerous. By building an emergency fund as the main pillar of your personal finances, you can avoid a lot of trouble and protect yourself from the unexpected. Start building your emergency fund today and give yourself the peace of mind.
Luca Caruana is the founder of the Money Coaching Hub. Follow his weekly column here and his LinkedIn account for more budgeting hacks. For other money-related columns, check out Luca’s hacks to budget like a pro.
