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 is such an important question that I wish everyone would understand more. An emergency fund is something that every single person needs and I want to help you understand how to get one.
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).
However, the truth is that nobody ever regrets having an emergency fund….but I know many who 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?
Not sure what an emergency fund is? 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. It should never be used for fun things, weekend vacations, etc.
Who Needs One?
Everyone needs an emergency fund (yes, everyone)! 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. Emergencies can (and will) happen to anyone at any time.
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 An Emergency Fund?
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 already have planned ahead and saved money for these hard moments, 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 it saved, 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.
What If I Feel Guilty?
I’m going to be honest with you, I really struggle using my emergency fund. For some reason it makes me feel guilty.
If you’ve ever felt this way before, know that you are not alone. If you are feeling guilty for wanting to use this 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 Saved?
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?
Wondering what exactly you should calculate when deciding on your 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.
I prefer to keep our emergency fund in a savings account or money market account. Whatever you do make sure you do not put this money in the stock market.
I hope this article helped you to understand everything you need to know about emergency funds! 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!