What Is An Emergency Fund?

Greetings! Today I want to talk to you about emergency funds! What is an emergency fund? Who needs it and why? When do you need it? Where to keep it, How is it best used? I’m covering all question you might have!

What Is An Emergency Fund?

An emergency fund is a sum of cash that you need to have just in case something unexpected comes up and you need to fork out the $ immediately. You may not need it for years but life does happen and you never know when the lightning may strike. Pun intended!

Who Needs One?

Everybody needs one. Even if you’re super rich. Emergencies happen to everyone! An emergency fund will help you live comfortably after an unforeseen event may occur. Now us poorer folk may need it a little bit more but being wealthy doesn’t automatically shield you from a financial crisis either.

What’s The Magic Number?

This is all related to what your net worth is, what income and expenses you have and what standard of life you’re accustomed to living. If you want to come up with a good figure for an emergency fund you should aim for a sum that can cover three to six months of your average expenses. Just to be safe!

So say if you spend $1000 a month (it’s important you include everything: rent, food, utilities etc..) You should aim for a number ranging somewhere between $3500 to $6000!

You should also ask yourself these questions when preparing your emergency fund:

Do you own your home?

Is it in need of repair?

How are the appliances/furniture looking?

The state of your car?

How stable is your job?

How many family members are there to “feed” in the worse case scenario?

What is and what is not covered by your insurance?

When Should An Emergency Fund Be Used?

In the utmost gravity of emergencies. Worst case scenarios ONLY. This fund is not for when you’re short of money for the month, or maybe a bit low on spending money. Tap into your savings for issues like this or try to cut down on spending.

This is for when your car breaks down and you urgently need a replacement. This is for when your whole basement gets flooded and you need to replace the furniture. An emergency fund should only be used for these types of events.

Also good uses for an emergency fund may include but not limited to: health emergencies, a sudden need to travel for family events, cash to live off after you got fired, a sudden drop in income, a partner is unable to work etc….

What Are The Benefits of An Emergency Fund?

What is the benefit of peace of mind? What is the benefit of knowing your family will still be fed if for some reason you can’t provide anymore? These type of emergencies can all be “solved” (mind the quotation marks) by a simple emergency fund.

Can You Afford Not Having It?

Well of course you can, you just won’t have the peace of mind we just discussed. But if you’re still single and maybe you don’t have a wife or kids or mortgage and in general: no responsibilities; maybe you can get off not having one or having just a small $500 fund for the “what ifs”! It all depends on a lot of factors.

How To Set Up An Emergency Fund?

If you have a nice chunk of change already saved up in savings, see what sum of money will cover most emergencies for you and set it aside. Put it in a different account. Make it a point to “label” it as your “emergency fund”.

However if you don’t have enough to cover I suggest to start saving up. See it as another bill that has to be paid until you reach your desired amount. Set up automatic bank transfers to transfer your money directly into your emergency fund every paycheque.

Unfortunately if you can’t afford to have an “extra bill” at the moment, try living on less or look for ways to increase your income. There are ways that can help you make it possible. Just save $50 a month if that’s what you can afford. In a year you will have $600 saved up. That can cover some minor emergencies that may come up!

Where To Keep It?

If it’s a big fund, obviously a bank account will be the best option but remember that you absolutely need to have funds that you can access immediately. On the spot. Don’t have your emergency fund invested in bonds or stocks that take ages to liquify.

Make it easy to get to. I would even suggest keeping some money hidden at home. That way you are 100% always covered!

That is all folks!

Remember to check out some of our most popular post on Financial Highway, I’m sure you’ll find them enjoyable! 🙂

Also drop me a comment below with your thoughts. I’d love to hear what measures you’re taking to build up your emergency fund! 🙂

Stay safe and Financial Highway