Today I am explaining exactly what is an emergency fund and why you need one.
One of my most asked questions is, “What is an emergency fund?” This question usually surprises because I strongly encourage every single person to have money saved for emergencies.
I know that it’s not fun to plan for financial emergencies, it’s much more fun to plan for the fun expenses (like a new car or big house).
I have never heard anyone regret having an emergency fund…..but I have heard many people regret NOT having one.
This article is answering all of the most asked questions about emergency funds, so you can start making one for yourself.
What is an Emergency Fund?
The biggest question is what is an emergency fund. It’s simple really. An emergency fund is money you have saved and set aside to be used in the case of an emergency.
This is money that you won’t touch unless you really have to. You don’t use it for fun things that come up on the weekends, it’s saved in a smart place for only the really important moments.
Who Should have an Emergency Fund?
Everyone needs an emergency fund! It doesn’t matter if you earn a million dollars a year, or are deep in debt, you should have money saved for emergencies. Don’t ever fall into the belief that an emergency won’t happen to you, they happen to everyone without any warning.
The amount in the fund will look different to everyone, based on circumstances and needs, but the fact that we all need, one stays the same.
Why Do I Need One?
You need an emergency fund because it gives you a safety net for any financial burden that might arise. This could be a job loss, large medical costs, or unexpected home repairs.
If you have this money saved and set aside the burden will be lessened. We have used our emergency fund multiples times! We used it when my husband suddenly lost his job, when I had a medical emergency, and during an unexpected move.
Every time we have used money from this fund I have felt so grateful we had one in place, but also developed the desire to save even more. There is no better feeling than having money in the bank. That form of safety is vital to me and our family.
When Should I Use Money From This Fund?
Deciding an appropriate time to use your emergency fund is very important. This is your hard earned money and should only be used carefully and wisely.
Never use your fund for anything other than what it is meant for, an emergency! Christmas gifts, traveling, and taxes are not an emergency, you should set up a sinking fund for these types of expenses.
When deciding if you should use your emergency fund ask yourself these questions:
Is it an Emergency?
Is it Unexpected?
Is it Necessary?
If you can answer yes to all three of these questions, than it is an appropriate time to use your emergency money. If you answered No, than do not use it. Instead come up with a different way to fund your expense.
Should I feel guilty when I use my Emergency Fund?
It’s common for many of us to feel guilty when using money for emergencies.
Remind yourself that it is OK, this is what the fund is for! You have been responsible in saving money, and it is ok to use this money when the time is right. It is there to USE, when you need it.
But, be sure to replenish the fund after your emergency has passed.
How Much Money Do I Need in an Emergency Fund?
The amount of money needed for emergencies will vary from person to person. A good rule of thumb is to have at least 6 months-1 year of living expenses set aside for emergencies. This is quite a bit more than others recommend, but I would rather you have to much than not enough.
When my husband unexpectedly lost his job, people kept telling us he would find a new one in a few weeks. 7 long months went by before we were finally receiving a paycheck again. Having that emergency fund in place brought us a lot of peace and comfort. If we had only of saved for 3 months, we would have been even more stressed and in a bad place.
What are Living Expenses?
Living expenses are the expenses that you need in order to live and survive. These will include housing costs, utilities, food, clothing, insurance, gas, and any other basic needs.
You do not need to add extras such as traveling, eating out, etc. If an emergency arises you will not be traveling, so there is no need to save for it.
Where Should I Keep This Fund?
An emergency fund needs to be kept in a place easy to get it. This fund is liquid, meaning you can access it in short notice. Do not put this money in the stock market. A regular savings account or money market account will work perfect!
I hope this article helped you to understand what an emergency fund and just how important one is. Let me know if you have any questions! I am always here to help!
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Now that you know what is an emergency fund, go set one up!