In this post, I’m going over my tips on how to build an emergency fund. But before I jump into how much I suggest you need, first let’s look at what I mean by an emergency fund.
Most people overestimate how much money they actually need in an emergency fund. An emergency fund is simply put, money that you’ve put aside to deal with any financial emergencies that crop up. It’s a rainy day fund so that you can use the cash you’ve saved, rather than have to borrow or use a credit card or the like.
It’s simply your financial buffer for when things go wrong.
And I think that’s important to keep in mind, because I feel a lot of people confuse their emergency fund with their regular savings, and they are and should be, completely different.
How much money do you need in your emergency fund?
So now we’ve established what an emergency fund is, how much money do you actually need in one?
There’s a lot of different opinions on this. Some people say that you need to save 6-8 months worth of expenses, others site smaller amounts.
Personally, I think 6-8 months is way too much. It’s not reasonable to expect most people can save up that amount just for an emergency fund.
If you think about what the purpose of an emergency fund is, and that’s to pay for financial emergencies that arise from your savings instead of your credit card, most of those types of emergencies just don’t cost thousands of dollars.
How much you actually need depends on your lifestyle and where you live. If you have a car, how much is, say, a new motor or other repairs typically? If you don’t, what sort of emergencies are you likely to encounter.
Once you figure out that, you can gauge how much you actually need.
But as a general figure, I think a range of between $500 and $2,000 is perfect for most people.
It’s enough that it’ll get you out of most financial emergencies that crop up, but not intimidating to try and save for.
Which account should you put your money?
Okay, so where do you keep it?
If a financial emergency does happen it means that you need to access that money really quickly.
So it needs to be in an account where you can get to it easily.
That could even be your regular everyday bank account or another account that’s easy to withdraw from an ATM.
Anywhere where you can get to it if you need it.
Don’t worry about interest rates or anything like that. That’s important for other savings accounts, but not for your emergency account. The primary importance of where to put your emergency fund is simply where you can get to quickly and easily if you need to.
Saving for your Emergency Fund
Saving for it is the same as saving for anything. I recommend you get to the minimum, $500 as quickly as you can so you have that buffer, and then you can gradually grow it over time to either one or two thousand dollars, depending on how much things cost in your part of the world.
If you can save $50 a week, you’ll get to $500 in just 10 weeks, but if you can only do $50 a month, that’s till just 10 months and by the end of the year you’ll have made the first step to a better financial future for yourself.
So to sum up, an emergency fund is simply a set amount of money, I recommend between $500 to $2000, that you save to take care of any financial emergencies that crop up so you don’t have to use your credit card. It should be in an easy to access bank account and you should try and get to $500 pretty quickly and then build up from there.
I hope this has helped you learn how to build an emergency fund so that you’ll be able to handle any financial mishaps that come your way in the future. Good luck!