An emergency fund is one of the most important components to have in your financial plan and yet so many people don’t have one. This surprises me because an adequate emergency fund provides security and peace of mind. It is the structural integrity and safety net of a financial plan and should be a top priority.
What is an Emergency Fund?
An emergency fund is an account of funds that is set aside to cover large, unexpected expenses or financial dilemmas. This can range from job loss to illness or medical expenses to large home repairs.
Why is an Emergency Fund Important?
Life is filled with uncertainty and planning for that uncertainty will help make it easier to deal with when it happens. Planning for financial dilemmas helps you to avoid having to borrow money to cover expenses. An emergency fund also provides padding for you to further your investments without leaving you financially vulnerable. Since you have money to cover the unexpected, you have the freedom to invest and further your financial goals.
What Else Do I Need to Know About an Emergency Fund?
The most important aspect of an emergency fund is that the funds are liquid and readily available to you. After all, you never know when disaster may strike!
Ideally, you want your fund to earn interest and grow when not in use. High Yield Savings Accounts are great for this. Do not rely on credit cards or equity loans as an emergency fund. This is borrowed money and not actually yours.
Also, your emergency fund should cover at least 3 months of expenses for you and your family. Eventually, you can grow this to 6 months or more of expenses. Liann and I have more than suggested, but that’s because we love the warm and fuzzy comfort of that security blanket!
5 Simple Ways to Build Your Emergency Fund
Budget for the Fund
Not much trumps good old-fashioned budgeting. You can contribute to your emergency fund through monthly budget and watch it grow.
Use a Tax Refund or Bonus Money
Many people look forward to a pay raise, bonus, or annual tax return. Instead of spending it on something now, get a jump-start on your emergency fund.
Get your Side Hustle On
Don’t have extra money to spare for your emergency fund? Start a side hustle. Sell items online, pick up a night shift…anything that will bring in extra income goes straight into the emergency fund.
Not on a bare budget yet? Look at your monthly expenses and see where you can trim or cut unnecessary expenses. Put those savings right into the emergency fund. Here are some ideas:
- Get rid of cable and replace it with a cheaper service.
- Stop lawn services.
- Cut out the weekly trip to the car wash.
- No more brand loyalty. Buy the on-sale, generic products.
- Use less electricity for air conditioning and make your significant other/children suffer in discomfort. Why not? Liann has no problem doing it to me!
Any extra savings you acquire from purchases or your monthly budget goes to the emergency fund. This can be money left over in the budget at the end of the month or savings you made on a larger purchase. When we started paying the car insurance in full every 6 month cycle, we saved $25 on payment service fees. Those savings would be put into the emergency fund.
Do you have an emergency fund? If so, share any tips or experiences below!