We have all heard of the term emergency fund, but what exactly is it? An emergency fund is a pool of liquid money set aside for unseen expenses; insurance against life’s unexpected expenses. It gives you peace of mind. People tend to struggle with what exactly an emergency is. An emergency is a refrigerator repair, a furnace breakdown, or a transmission for your vehicle. It is not a vacation, Christmas, a big screen television, or that pair of shoes that you just have to have.
How much money should be in the emergency fund? Financial advisors suggest to establish an emergency fund with enough cash to cover at least 3 to 6 months of your net income. Dave Ramsey suggests saving $1,000 in your emergency fund first and then tackle your debt. This is to help so that you do not use your credit cards or line of credit during the emergency.
According to www.balance.com, the 8 reasons you need an emergency fund are:
- You are trying to get out of debt.
- You have just started budgeting.
- You only have one income.
- You are self-employed or a contractor.
- You own your own home.
- You live far away from family.
- You have medical issues.
- You are saving for a goal.
I currently have a separate bank account for my emergency fund. The emergency fund takes time to build up. I make bi-weekly contributions to it and I don’t miss the money. I depleted some of my emergency fund when I lost my job, but I am slowly contributing and building it back up. It is difficult to do but must be part of your financial plan. If you dip into your emergency savings, make sure you top it back up as soon as you can. Another emergency doesn’t need to derail your budget.