Life is full of surprises; some good, some not so much. Being financially prepared for whatever comes your way helps bring peace of mind. Join us as we examine the importance of maintaining an emergency fund.

Emergency Fund

An emergency fund is a sum of money set aside to deal with unexpected expenses. You can keep it in your bank account or other cash equivalent such as a standard brokerage account. 

Common types of emergency expenses include home and auto repairs, medical bills, and loss of income – anything not covered by your household budget. In order to distinguish between budgeted living expenses and everything else, you need a budget. If you would like to learn more about creating a budget, check out our article entitled How to Create a Budget.

Size Matters

The first step in setting up an emergency fund is to establish the amount of money needed. Financial planners advise three to six months of living expenses. If you own a home, you need money for repairs. According to MONEY Magazine, you need 1-3% of your home’s value set aside for home repairs.

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The size of your emergency fund also depends on your situation. If you are part of a dual-income household, you may not need as much. What are the chances both of you will lose your jobs at the exact same time? The fact that your spouse or partner works means you can probably get by for a time on just one salary.

Another deciding factor is the degree to which you are employable. That is a function of your profession and the economy. Fields such as STEM and nursing are always in demand. People in these fields probably don’t need six months of living expenses because it's unlikely they would ever be unemployed for that length of time.

Nuts and Bolts

You can open a separate bank account or maintain the fund within an existing account. If you choose to keep your emergency fund in an existing account, you will need to treat it like an imaginary account within the existing account in order to keep track of it. A simple spreadsheet can help you do that.

Once a month, do a look-ahead to determine how much money you need based on your budget and spending habits. Any money left over can be earmarked as part of the emergency fund. If you prefer to use an actual account, at the end of each month you would need to transfer funds into the account. Most banks allow you to do that online.

Can You Keep a Secret?

An emergency fund is only as good as the money that’s in it. Don’t let anyone know that you have an emergency fund or you may become the de facto emergency fund for your entire family. If you start lending out money from your emergency fund, you may never see it again. Someone who lacks the means and organizational skills to maintain an emergency fund may not pay you back.

Conclusion

An emergency fund can give you peace of mind and help keep you out of debt. Live beneath your means and set aside some money each month for a rainy day. You’ll be glad you did.

Photo credit: Pixabay Eggstack News will never post an article influenced by an outside company or advertiser. Our mission is to help you overcome uncertainty about retirement planning and inspire confidence in your financial future.