An emergency fund is just what it says…funds used for emergencies. How well prepared will you be when life throws curveballs at you and you need additional money right away? I’m sure everyone will experience a curveball emergency at least once in their life and it will require money to get through it. Typically, these are unexpected which makes them an emergency.
What kind of curveballs are emergencies? Death in the family, being laid off, medical procedure that keeps you away from work for weeks or months, house repairs from a disaster, trying to help a family or friend financially, or severe car accident are some I would categorize. You may have other unexpected life events you consider emergencies.
If you had an emergency fund during an unexpected emergency, how better secure were you going through it? You may have felt less stressed about it. You may have been able to focus on the emergency instead of how to pay for it. You may have felt more prepared.
If you didn’t have an emergency fund during an unexpected emergency, how did you feel going through it? You may have felt stressed. You may have less focused and felt helpless. You didn’t know how you were going to get through it.
I went through a few emergencies in my lifetime. I was laid off once and had multiple deaths in the family less than 6 months apart. In each of these emergencies, my first thought was how will I be able to get through it financially? Everything has a cost. It’s unexpected. You might have to buy a last minute plane ticket; you might have to quit your job; you might have to take time off without pay; you might have to move. Luckily, I was prepared to handle these emergencies financially. While I was laid off I had enough in my emergency fund until I was able to get a new job. With the deaths in my family, I had enough emergency funds to pay for all the necessary costs.
An emergency fund is not an investment. It’s not a fund where you can’t access the money right away. It’s a pile of money where you have immediate access to it when needed like in a savings account. Here you’ll be able to pull money from it and it will gain a small interest in the meantime. You might be thinking that the money can be better off in a growth investment account. Keep in mind that investment accounts can go down, not just up. And you’ll have to sell your shares and transfer money back to you which could take days or weeks.
How much money should you have an emergency fund? It’s a difficult question to answer because it’s different for every person. Some say 3 to 6 months worth of your expenses. Some say a years worth. I would say think of a realistic worse case scenario and use that to calculate your emergency fund. If a worse case is being laid off, then calculate how much you would need for 6 months without a job. That becomes your emergency fund.
If you ever have to use your emergency fund, do not forget to replenish it. You never know when the next emergency will come. I had 2 family deaths 6 months apart and having a replenished emergency fund helped. Whether you like it or not, emergencies will happen.
The feeling of financial helplessness in an emergency situation can be avoided. Start preparing for it by building an emergency fund that you can tap into when you absolutely need it. If you are interested in following my journey, email subscribe to get alerts of latest posts or follow me on Facebook and Instagram.