An emergency fund is an account where you set aside money in case of an unexpected financial expense. It can help you in the event of a financial shock like illness or losing your job and can also help with smaller shocks like medical expenses or winter heating bills.
An emergency fund will allow you to absorb financial shocks without derailing your savings goals or having to cut back on your day to day living expenses.
Step 1: Figure out how much you need
There’s no set amount for an emergency fund, it will depend on your circumstances. If you have children and pets, you might want to consider unexpected vet and dental expenses or if you are a contractor, how long might you have to go without a pay-check between contracts?
A general rule is to aim for three months of your total living expenses. This means that no matter what happens, you should be able to cover costs while you figure out a plan. It may take you time to reach the total financial buffer you need but every dollar you put away is one you won’t need to find next time you experience a financial shock.
If you have a monthly budget you can use this to figure out how much this amount will be. If you don’t, now is the time to create one.
Step 2: Start saving into your fund
An emergency fund is different to your regular savings so you may want to use a separate bank account to make this distinction clear.
Use your budget to figure out how much you can save per month; you can then use a savings calculator to see how long it will take you to reach your goal. You can continue to put money into a savings account, just decide how much you want to direct towards both your savings and your emergency fund.
Step 3: Define what an ‘emergency’ is for you
Once you’ve started putting money aside, it’s important to decide what you will and won’t use the emergency fund for. You should clearly define your emergencies to prevent yourself from dipping into it unless you need to.
Possible reasons to dip into your emergency fund might be:
- Job loss
- Large medical or vet bills
- Car repairs
- Long-term illness
Step 4: Keep it topped up
If you do have to use your emergency fund make sure you start topping it back up as soon as you can. It’s important to make sure it’s replenished so that you’re always prepared for what’s to come.
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