These are all questions that haunt the many of us on a regular basis.
Myriad articles talk about having money set aside for a rainy day, it almost seems like emergency funds are overrated. The truth though, is an emergency fund is anything but!
What Is An Emergency Fund?
I first learned about an emergency fund when I was just a little girl. It was my father who handled finances in the family and I distinctly remember that one envelope labeled “emergencies”. I couldn’t really understand what an emergency was though at that age.
The most ‘classic’ example of an emergency is your car breaking down. It’s never pleasant having to fork out a few hundred bucks for repairs. Other examples of unexpected situations include urgent medical expenses or having to pay the bills if you suddenly lost your job.
It’s tempting to believe bad things only happen to others. But if you suddenly find yourself in a pickle, can you honestly say you’re financially ready?
With that being said, an emergency fund is an important source of money that serves a specific purpose: being available in case a financial disaster strikes.
Why is an Emergency Fund Important?
As you can imagine, emergency funds should be set up with a clear financial goal in mind: having enough funds available to cover unplanned expenses. Having a handy source of money when you need it can be a great help.
First of all, it’s really important to feel financially secure. Although many have a “that’s not gonna happen to me” attitude, others are smart to take precautions. Having money stashed away, even if untouched for years, can help you feel safe. Knowing you have funds already available can reduce the stress of constantly thinking “what if?” Furthermore, having an emergency fund in place will help you avoid the need to borrow unplanned money. Often times, many mistake payday loans for easy cash and a quick fix. Other times, credit cards are maxed out in order to pay for an emergency. When you don’t have a safety net, borrowing seems to be the next best thing.
Years of paying high interest and fees though, doesn’t sound appealing to anyone. Especially since borrowing money usually means your monthly income isn’t enough to handle an emergency ‘out of the blue’.
How Can You Start an Emergency Fund?
As soon as I understood the importance of an emergency fund, I began wondering how to build mine! Before getting started though, it’s important to know what an emergency fund is and what it is not:
- Stashing money away to afford buying designer clothes – not an emergency.
- Saving money because you plan to quit your job – good idea.
- Last but not least, building an emergency fund, ‘just in case’ – smart financial move!
With that being said, the easiest way to start an emergency fund is to simply rethink your budget. Planning to save money with a purpose can be overwhelming, but it’s important to point out that every single journey starts with a first step.
Although living paycheck to paycheck doesn’t exactly allow you to save as much as you’d need to, there are plenty ways to develop better spending habits and save more. Do you have an extra $20 to spare right now? Saving it counts as a first step.
Furthermore, there are myriad monthly household expenses to cut and save money. For instance, downsizing and cooking at home are only 2 of the many ways you can free up funds to add to your emergency savings.
Although we live in a consumer-oriented society, saying no to unnecessary expenses is yet another way to keep more money in your pockets and use them with a better purpose. Experts suggest having at least a few months’ worth of expenses in savings. Typically, having enough money stashed away to last for 6 to 12 months is ideal.
In order to get there, you can start by saving your first $1,000. Once you’ve done that, save another $1,000. Then another, and another.
Keep adding to your emergency fund month after month and soon you’ll be able to look at your savings and smile!
About The Author
Adriana is an experienced web content writer, passionate about everything personal finance. She blogs about the topic over at moneyjourneytoday.com, where she covers everything from saving money and frugal living tips, to real estate and investing.