Unexpected financial problems may happen to all of us. It can be like car repairs, surprise medical bills, broken appliances, losing a job or even a cracked phone screen.
These things always seem to come at the worst times. But we should always be ready for situations like this, shouldn’t we?
Having an emergency fund for yourself is one of the most effective ways to prepare for extreme situations. Even small, but regular savings can make a big change.
This approach will allow you to manage surprises better and stay focused on your larger financial goals.
What is An Emergency Fund?
So, what is an emergency fund in general? A special savings account just for surprise expenses. It refers to the money you save just in case something unexpected happens, for example if you use your stable source of income or you need to fix something.
It’s more of a financial backup plan that helps you cover sudden expenses without getting loans for personal expenses or getting overwhelmed. Having this money saved means you won’t have to use credit cards, or ask yourself how to apply for a loan when something goes wrong. It gives you peace of mind, because you know you’re ready for life’s “just in case” moments.
Even setting aside a small amount periodically can be quite beneficial, making you believe that you’re prepared for surprises.
This fund is not for shopping, vacations, or regular bills. It’s only for emergencies.
Why Do We Need One?
Have you ever asked yourself what life would be like if you could have a certain amount of money kept somewhere that would help you solve your unexpected financial issues? That’s why we need an emergency fund. Life can have lots of ups and downs, you may lose your job, unexpected health issues may occur or your car may break down, so, without savings, you might have to borrow money or use credit cards. An emergency fund created beforehand protects you from financial stress and debt during those hard times, and helps you stay in control and feel more secure in your finances and to know that you have saved enough for times like this makes you feel more consistent and confident.
No one wants to face a hard time when life feels out of control or budget is tight. But it’s really important to be aware of your spending and be ready before something unexpected happens.
So, how much should you save for emergencies? Let’s find out together.
How Much Should One Save for Emergencies?
How much is an emergency fund? you may ask, answers may differ, but the main idea is the same.
The amount you need to save for an emergency fund depends on your situation, but the base saving amount should be calculated on a three to six month basis, this should include basic living expenses like rent, food, bills and transportation.
If your job is stable and you don’t have many people who you should take care of, three months might be enough, but if your income changes often or you take care of others, it would be better to save for six months or even more. Don’t worry if you can’t save a lot right away-starting small is perfectly okay. Even a few dollars a week adds up and gives you more peace of mind over time.
If you’re just starting, it’s a good idea to save at least 10% of your income, but if you do 5%, it’s okay too, if your money is tight, it’s good to start from this amount too.
For example, if you get $500 a month, try to save $25-$50. Here, what matters is being consistent.
You can set up automatic transfers to your fund each time you get your salary, or transfer to someone else who you feel safe to trust your money, so that you can ask them to send your own money whenever you need it, if you think that you may spend that money, it’s safer to trust it to someone else.
Whenever your income grows, your emergency fund savings can increase too, this means that you can save more if you earn more.
If you’re not sure how much to save from each paycheck, start considering your current expenses. Just calculate your average monthly expenses, listing how much you spend on each of your essentials like food, rent or transportation, by doing this you may know approximately how much you will need later. It will help you understand how much to put aside to eventually cover 3-6 months of those costs.
Let’s explore a few tips on saving money.
A helpful tip would be saving like a regular bill you owe to yourself and add it to your budget, just like rent or phone payments. It will help you stay disciplined. But remember, that if you can’t save much at this moment, any progress is better than none. So make it a habit to save as much as you can, depending on your monthly income.
If you have received a bonus or a birthday reward, try saving it for later, because if money comes unexpectedly, try to make a good use of it, in this case – saving for emergency situations.
But, where to keep all of these funds, if you are not sure about spending it in vain?
Where Should Emergency Funds Be Kept?
Worrying about the safety of your savings is completely normal, but it’s important to know where to keep them so nothing gets lost over time.
There are many places you can keep your funds, let’s see the options.
- Money Market Accounts
- Cash Emergency Fund (can be kept at home, but small amounts)
- Regular Saving Account at a Bank
- Trusting Your Funds To A Friend
Money Market Accounts can be a safe place for your savings and those can give you a bit more interest,because they can let you use checks or a card in case of emergency situations.
Cash at Home is a good option to keep your funds, but it’s extremely important to know exactly where at home you should keep it, because the place you’re going to keep your funds should be very safe and secure and far from a stranger’s eye. It’s also important to note that it’s always risky to keep money at home, unless it’s somewhere very safe. Avoid keeping it on a surface, in books or in drawers that are easily accessible.
Regular Saving Account at a Bank. Banks are always a safe place to keep your money. It’s best to use an account separate from your regular spending account. Some savings accounts restrict access to your money until a set period passes. Many people find this useful because it builds self-discipline and appreciation.
Trusting your funds to a friend can be a safe way to keep your savings, but only if you’re confident the person won’t lose the money or spend what isn’t theirs.
These ways are safe, but you should know how to start saving, to start the process of thinking of where to keep it.
So, let’s see how to build an emergency fund from scratch.
How To Build An Emergency Fund From Scratch?
It might be hard to build an emergency fund all at once. But it’s completely possible when you know why you’re doing it. Starting with a small amount is absolutely normal. What matters is not how much you save. What matters is that you take steps toward saving and building an emergency fund for a better future.
So, how to do so?
Set exact goals, they can be small too. You should know what exactly you will need those emergency funds for. So, set an amount, it can be $100 or more, depending on your mindset.
Save a little from each paycheck. Whenever you get your salary each month, try to save 5-10% of it, it adds up over time. It’s important to keep doing this regularly.
Cut back on small things. Try to see how you manage your regular spending, what you spend your money on. If there are things that you find unnecessary at some point, just cut them back and use that money for your emergency fund instead.
Keep extra money when you get it. As mentioned above, you can save the money you receive as a bonus or birthday gift. Add it to your emergency savings account. It’s an easy way to grow your fund faster.
Tools to Maintain and Grow Your Emergency Fund
There are a lot of good budgeting apps that you can use to maintain and grow your emergency fund. Here are the most useful and popular ones.
- YNAB (You Need A Budget)
This will help you plan your expenses, keeping your goals in mind. You can set an exact category for your emergency fund here and build healthy money habits for yourself.
This tool will automatically track your income, savings and spending, will let you set an emergency fund. It includes helpful visuals and reminders you can use while building your healthy financial habits.
This user-friendly application will help you create an envelope for emergency savings, a budgeting system and stay disciplined with your spending.
This tool will allow you to set saving goals and automate your savings and offers fun rules, such as saving $5 every Monday. An amazing automation tool.
These money-saving apps help you improve your financial independence and build an emergency fund for unexpected situations that can happen to anyone.
Conclusion
In addition to all this, it’s extremely important to remember that an emergency fund is one of the smartest ways to protect yourself from life’s unexpected moments. Remember to take small steps toward creating an emergency fund. Don’t focus on putting a large amount of money into your savings right away. Focus on simply saving, no matter how much—save as much as you can.
And as Benjamin Franklin once said – “Beware of little expenses. A small leak will sink a great ship”. So, know how to keep yourself in check, evaluate your expenditures every month and try to cut back on any miscellaneous, unbudgeted expenses.
To stay more motivated to save more, make sure to follow these quotes by famous individuals.
Start today and your future self will thank you.
