How Much Should Your Emergency Fund Be – Most personal finance experts agree: The first thing you should do (after meeting basic needs) is establish an emergency fund.
Life is full of unexpected surprises, many of which cost money: a thief breaks the windshield of his car, his son gets sick, his water heater overflows. When people live paycheck to paycheck without savings, they are at the mercy of these small crises. Sometimes a small problem becomes a huge one because the victim was not prepared for possible problems.
How Much Should Your Emergency Fund Be
What is an emergency fund? An emergency fund, or “emergency account” or “safe money” or whatever you want to call it, is an amount of change set aside specifically for the unexpected things life throws at you. It should not be used to purchase a new car. Not to be used for a vacation in Paris. It should not be used to remodel your bathroom. It is to be used only in an emergency: a tree falls on your house, your youngest daughter breaks her arm, you lose your job.
Your Emergency Fund: How Much Is Enough?
Unnecessary if you are rich. But these friends are not rich. For most people, emergency funds are a form of self-insurance. They are a proactive way to protect you and your family from random unpleasant events.
Although personal finance experts agree that emergency funds are necessary, there is no consensus on how much is enough. Here are just a few recommendations:
It’s better than nothing. Reserve $500. Or $100. Or $20. Over time, work to build this cushion until you have $1,000 or $5,000 available for a catastrophe. Ultimately, you’ll sleep better if you have six to twelve months of living expenses in the bank. It’s a comfort to know that if you lose your job, you won’t lose your home right away.
Finally, it is advisable to keep emergency money in a place that is not easily accessible. (Ignore this advice if you know you are disciplined enough not to use the money for other purposes.)
Ways To Jump Start Your Emergency Savings
For example, you could open an account at a bank across town. Or deposit the money in an Internet bank. Or put the money in a certificate of deposit. Don’t carry a debit card tied to your emergency fund. You’ll still have access to cash when you need it, but you’ll be forced to consider your actions before making a withdrawal.
But what is an emergency? This is an interesting question and one I’ve thought about a lot lately. How do you decide what is and is not an emergency?
Sometimes the answers are easy, of course. A Florida vacation is not an emergency and should not be funded from your emergency fund. New boots are not an emergency, nor is a new video game console. On the other hand, if your only car is totaled, buying new transportation is an emergency. Or if your child breaks a leg, your medical expenses are an emergency.
But what about all the things in between? What happens if your computer dies? Is that an emergency? Or should you just go to the internet cafe? What happens if the garage roof starts leaking? What if you have an unexpected dental bill?
Wondering How Much To Save For An Emergency Fund?
Ultimately, I think the key is to decide for yourself what your emergency fund can and can’t be used for. But once you make that decision, stick to it.
From experience, I know that it can sometimes be painful to see a large amount of money sitting unused for months (or years). But also from experience, I know that when a natural disaster (or any other type of disaster) strikes, an emergency fund goes a long way toward preventing financial disaster as well.
Studies show that those without emergency savings are more likely to accumulate debt. Your emergency fund acts as self-insurance and protects you from small disasters. If you have a cash cushion, your financial plans can’t be derailed by a single unexpected event, unless it’s huge.
In 2006, J.D. founded Get Rich Slowly to document his quest to get out of debt. Over time, he learned to save and invest. Today he has managed to retire early! He wants to help you master your money and his life. No scams. No tricks. Just smart money tips to help you achieve your goals.
The Simple Emergency Fund Savings Guide
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How Much Do You Need In Your Emergency Savings Fund?
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How To Build Your Emergency Fund
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Emergency Fund: How Much Should I Save In 2023?
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A Guide To Your Emergency Fund
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