An emergency fund is an essential financial tool. If you don’t have one already, you should think about setting one up as soon as possible. Find out why.
What’s an Emergency Fund for?
Typically, an emergency fund is built for small emergency expenses that could disrupt your budget. Your car stalls in the parking lot, and you need to have it towed to a mechanic. Your toilet overflows, and you need to call a plumber. Your fridge stopped working, and you need a replacement fast. An emergency fund could be useful in all of these situations.
Many financial experts recommend that you stretch your emergency fund further so that you can support yourself through bigger problems like job loss or bereavement.
What Are the Benefits of This Fund?
There are several benefits that come with an emergency fund. First, it helps you recover from an expense without affecting your budget. So, you won’t need to worry about how a surprise car repair or plumbing fix will affect your ability to pay for groceries or bills for the rest of the month.
It’s easily accessible. You don’t have to worry about waiting periods or creditor approvals to reach your funds. You can pay right away.
It’s 100% your money, not borrowed funds. So, you don’t need to worry about interest or repayment. However, once you use the funds, they’re gone. You have to make an effort to replenish those savings for the sake of maintaining a safety net.
Finally, it can keep you from making unwise financial decisions, like pulling savings from a retirement fund. With this small amount of savings set aside, you can deal with an emergency and keep the rest of your finances in order.
How Do You Build One?
Start by looking at your budget to see what savings you can safely move into the account every single month. If that doesn’t seem like enough, try to trim your variable expenses. Simple actions like using popular couponing sites to save on groceries or washing clothes in cold water could help you stretch your budget. Or you could try to increase your income by asking for a raise, taking on a side-hustle or selling unwanted household items online.
What Can You Do While You’re Building It?
It takes time to build up an emergency fund. It could take months before you’ve collected enough to handle the costs of a small home repair. So, what if something goes wrong before you’ve set up this safety net?
If you don’t want to be without a safety net, you should consider applying for a line of credit online. The revolving credit option can be a useful backup plan when you don’t have enough savings to pay for a small emergency cost. For more details, you can click here to see how does a line of credit work and what are the application requirements personal lines of credit. See if this is the right choice for you.
How Much Should You Save?
Many financial experts recommend that you save between three to six months’ worth of your income in your emergency fund. That advice will yield different results for households in different income brackets. This is why some economists prefer suggesting specific numbers, recommending that low-income households save a minimum of $2,467 in their funds. That can help cover the basics during a cash shortfall.
Don’t get the rug pulled from under your feet by a surprise expense. With an emergency fund, your finances will stay steady no matter what.