What is an Emergency Fund and How Should I Start One?
When you were younger, your parents probably constantly reminded you to save up for “rainy days”. And they’re right, because there’s nothing that could hinder your financial stability and progress faster than a costly emergency.
Whether it’s a lost laptop, minor accident or sudden illness, an emergency could happen at any time and you will need enough funds to tide you through the crisis at hand.
Why do you need an Emergency Fund?
An emergency fund is a stash of money that is cast aside every month and is left untouched, except for emergency situations. This fund is extremely crucial if you are the breadwinner of your family and saving for one should be a habit for all working adults.
Meeting financial obligations when you are in good health and holding down a good job isn’t difficult. But imagine not having any income due to unforeseen circumstances. Having an emergency fund is not a luxury – it is a necessity.
I’m in my 20s. Must I really start now?
If you want to avoid a personal financial crisis, and live out your long term life goals, it’s a simple and resounding yes! Saving is a habit that most of us struggle with especially in our early 20s, and while it may seem less gratifying than instantly spending, it pays off in the long run.
Have you heard of compound interest? Nearly all savings accounts today offer compound interest, and some will compound daily while others compound semi-annually. Compound interest is the magical force that makes saving money in your 20s advantageous, as it will give your funds a longer time to grow. Put your Emergency Fund in a Savings Account with high interest rates and watch your money grow!
Saving might not feel good at first, but it is good. After all, your parents are not going to be your financial safety net forever.
How much should I have in an Emergency Fund?
Financial experts have agreed that you should have “between three and nine” months’ of expenses saved in an emergency fund. That means if you need $2,000 a month to pay your bills, you should have between $6,000 to $18,000 in your savings!
Use this Emergency fund calculator to know how much you should be saving!
Another aspect to consider is how difficult it would be to regain your income, should you lose your job. The more challenging it’ll be, the more you should save in your emergency fund. This could mean saving up to a year’s worth of expenses.
Start small, or don’t start at all
You don’t have to build your emergency fund all at once. If you’re just starting out, start by saving your first $1,000 or two weeks’ pay, whichever is a bigger amount. After that, you can gradually work towards saving the recommended 3 to 9 months’ of funds.
Remember to first put aside a part of your income every month into your emergency fund no matter how painful it may be. When we save before spending, we are doing what financial experts call “paying yourself first”. That means putting a portion of your paycheque into your savings account before bills and expenses even get close to your money. This doesn’t mean you need to live like a miser. The point is to spend within your means and not end off each month with only $0.50 in your bank account.
We save to spend better!
One thought that always helps us stay dedicated to an emergency fund is remembering that we save to invest. By having a solid emergency fund, you’re helping yourself gain more freedom to spend on what matters most to you. Is your next paycheque coming soon? It’s now time to get started on your emergency fund. Good luck!
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