“Now I know why they say, you must have an emergency fund!”. Those were the exact words that my colleague stated when I met her a few days after she was laid off in Sept 2008.
Emergency fund?
An ‘emergency fund’ is a stash of money that you tap into only in case of an unexpected event that life throws at you. Examples – company layoffs, medical bills, home repair, appliance repair, car repair etc.
I recently had such an event in summer of 2021 when my 20+ year old AC died in peak summer. The minimum cost to replace the AC was around $5000. Luckily, I could pay off the expense using the money saved in my emergency savings.
Why do I need one?
For peace of mind! Yes, you can always pay off most of your bills using credit cards but if you already carry credit card debt, then you don’t want to add to it and pay more interest. The fund serves as backup so that you can be ready when life throws those curve balls at you.
How do I start saving?
You can contribute a certain amount every paycheck towards your emergency fund. Better to do this automatically. Employers typically allow you to split your pay into multiple direct deposit bank accounts. You can also add in your tax refund or any bonuses that you receive so that you reach your savings goal sooner. After you’ve built your emergency fund, you can start contributing to other investments. Also, remember to replenish your fund after you’ve used up some of the money for a legitimate emergency.
Where do I save it?
Keep the fund untouched and hidden from your own eyes. Protect it so that you don’t spend parts of it on things that you don’t need. My suggestion – save the money in a separate savings account which is not linked with your credit card or debit card. Capital One allows you to create multiple savings accounts with just a few clicks. You can create a new savings account with a name: ‘My Emergency Fund’ and start contributing today!
Been procrastinating on this one. Maybe time to start accumulating.
Never too late to start building up your emergency fund!
Always have a rainy day fund. You never know what life throws at you.
I keep 9 mths worth of expenses in cash in an emergency fund. I know that’s a little too much, but my wife does not work and so I think I need the additional safety net.
I’m saving 3 mths worth of living expenses but need to bump it upto 6 mths cause life happens!
And when you get to 6, try 9 to 12 mths. Anything beyond that is not required. Put the extra money towards paying any high interest debt and investing.
An emergency fund is absolutely needed. You don’t want to scramble around for money if there’s a sudden big expense.