Everything You Need To Know About An Emergency Fund
Life is full of uncertainty and you never really know what is around the corner. Therefore, having an emergency fund is an essential aspect of your finances. Despite being such an important factor in everyday life, not everybody has a fund, or even understands what they are. So, we have put together some information on everything you need to know about an emergency fund down below.
What is an emergency fund?
An emergency fund is a personal source of money which you set aside in case of an emergency. This means that if you are hit with an unexpected bill or fee, you will always have something to fall back on. This also saves you from borrowing a loan or borrowing from family and friends. It enables you to not have to worry too much about anything which may go upside down in your financial life.
What do I need it for?
Emergency funds are not budgets which are used to buy luxury items, houses, or even cars. They are purposely for emergencies and unexpected bills including things like:
- Medical Bills
- Family Emergencies
- Unexpected Debts or Fees
- Car Repairs
- House Repairs
How do I create an emergency fund?
To create an emergency fund you need to begin with a simple budget for all of your finances. This way you are not saving up random amounts each time and your savings will always be streamlined. This means that every month or week when you add to your emergency fund, you know how much you will add and how much there will be remaining.
Another step you should take is to set a goal. Although a budget will help you stay on track, some months you may not be able to exactly stick to your budget due to other bills or spending. Therefore, setting a goal is the next best thing you can do. Make sure your goal is a smart target which works with your finances before you begin your journey. Each month or week you should try to aim or even pass your goal to ensure you are on the right tracks.
If you are just beginning your journey of building an emergency fund and do not want to jump straight into the deep end we recommend building up fund gradually. By this, we mean that each month the amount you put in your fund should increase slowly.
Where should I keep my emergency fund?
We recommend that you do your research to be able to understand what and where is best for you. But, some of the most common places consist of:
- Savings accounts with high-interest rates
- Accounts with easy access
How big should it be?
The size of your emergency fund depends on your personal finances. Somebody who has a larger income should have a larger emergency fund than somebody who is earning less. There are plenty of factors which come into play when determining the size of your fund. The main aspect you need to keep in mind is how much you earn and how much you are able to comfortably put into a fund.
If you find yourself in a situation where you are unable to pay for emergencies due to a lack of funds, there are a couple of options you can take. Firstly, we suggest asking people you know if they would lend you what you need. The second option is getting a short term loan. Although, you need to be careful as you could end up with serious further financial issues and debt if you are unable to repay your loan.