What is an Emergency Fund and Why Do You Need One?

man saving for his emergency fund

Last Updated on May 31, 2023

TL;DR – An emergency fund is a saving worth three to six months of your monthly salary for emergencies, like job loss, medical emergency, or home repairs.

What if you suddenly lose your job? How long do you think you’ll survive without asking for help from your family and friends or before taking a loan?

Some may say a month or two, but for many employees living paycheck-to-paycheck, it’s a week or worse since they are already knee-deep in outstanding consumer and lifestyle debt.

The culture of living paycheck-to-paycheck is widespread among the working class because handling money was never taught in school and was almost taboo to discuss at home.

Life is very unpredictable. Many things can and will happen, mostly without warning, which may put you in a financial disaster. This is where the emergency fund comes in.

What is an Emergency Fund?

person putting coin in a piggy bank as emergency fund
Photo by maitree rimthong on pexels. Com

An emergency fund (or a rainy day fund), is a saving, usually worth three to six times your monthly expenses or salary, depending on your preference.

But there are situations where you’ll need to have more than a year’s worth of emergency funds.

This fund should only be used as a safety net for when an unforeseeable event suddenly happens, hence, the ’emergency’ in its name.

Why Should You Save For an Emergency Fund?

You may lose your job, your house needs immediate repair, or you suddenly get sick. This will significantly disrupt your budget (if you have one) or put you in debt.

So basically, the emergency fund serves as your buffer to cover your unexpected expenses.

Who Should Save For An Emergency Fund?

It is everyone’s responsibility to save in case of emergencies, especially if you are the breadwinner. Can you imagine what will happen to your dependents if you suddenly cannot work?

This is also a major requirement that you should have before investing.

What Counts As An Emergency Fund Expense?

Personally, I classify an emergency as a difficult event to predict. This includes job loss, natural calamities, sickness, and other unfortunate circumstances.

Car repair/maintenance is not an emergency because you know it will happen sooner or later. You should already have insurance or savings for it.

The tuition fee is also not an emergency because you know that your children or siblings need to enroll every year. Most importantly, the new shoes, clothes, or phones you see on sale are never an emergency.

Where Should You Keep Your Emergency Fund?

Your emergency fund should be highly liquid. Meaning it should easily be accessible when needed. So placing it in a savings account is advisable.

It is also best to have a separate bank account for your payroll account to quickly identify funds.

Personally, I have two separate banks holding my emergency fund. So if one bank is offline, there is another option.

You should also have a stash of cash set aside at home because there are times when going to the bank is a hassle and money is needed immediately.

After completing your emergency fund, it is also good to place a part of it in a low-risk investment like high-interest savings banks, short-term bonds, or money market Funds.

Emergency Fund vs Credit Card

Using your credit card as an emergency fund is a big NO!

Thinking that your credit card is free money that you’ll use during emergencies will only put you into debt.

Sometimes, using a credit card is better than cash, but this is not applicable in emergency funds.

Final Thought:

Having an emergency fund is crucial and fundamental to anyone’s financial stability. It can save you from undesired debt and problems when unexpected events happen.

If needed, never hesitate to use it. Let it serve its purpose. Afterward, you can always save replenish it.

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