Why You Should Have an Emergency Fund
Life will often serve up a couple of financial curveballs, and when that happens it’s essential that you are financially prepared for it. The only way you can ensure that you are prepared is to have an emergency fund, a healthy amount of cash that is easily accessibly should you ever need it.
Emergency funds are often one of the most neglected parts of personal finance but in my opinion they are one of the most important. We don’t like surprises, but if your car breaks down, or your boiler stops working at home how will you be able to cope without a backup source of funds to turn to?
To create and maintain an emergency fund takes dedication and discipline, but if you start to build one slowly then you’ll soon forget that you even started it. I’ve read many times that you should have between 3-6 months worth of expenses in your emergency fund, but this is fundamentally up to you to decide, only you know your level of expenses and your level of debts.
Most sudden losses of income are just that, they are sudden emergencies that we had no idea were coming. If for example your car breaks down, you still need to be able to drive to work so you will need it fixed as soon as possible, without a fund it will probably lead you down the road of lending the money which will just leave you in debt.
Getting started is the hardest aspect of an emergency fund, think small and start building your fund slowly, maybe even just $20 a month. Save what you can afford and slowly you’ll realise that you can build on the amount you save, moving on from $20 to $40 and so on.
Make sure you get the most out of your emergency fund by leaving the money in an interest bearing bank account, but it’s extremely important that the bank account is easily accessible. You don’t want to find out your boilers broke then realise you need to give 1 months notice before withdrawing your hard earned cash from your account.
Choose your high interest bank account carefully, maybe in the US you’ll use a standard savings checking account that doesn’t cost you any money to withdraw, and you can do so whenever you need some cash. In the UK we have a cash ISA account that is brilliant for easily accessible savings.
When setting up your emergency fund probably the hardest thing you’ll have to deal with is temptation, try not to touch your fund unless it’s an emergency. You might see a nice watch or a new pair of shoes that you like but remember that these emergencies can happen at any time, and it’s better to be safe and prepared than sorry.
