Life can be crazy and unpredictable, in ways we cannot even imagine especially during the last two years dealing with this pandemic.
Most people got laid off, lost their jobs and unable to cover their basic finances. According to new data from GoBankingRates, 69% of Americans have less than $1,000 saved in cash…and a staggering 45% have $0 in savings.
That is very shocking.
Building an emergency fund is one of the prerequisites to investing and if you want to build wealth, you have to have a fund that you can tap into whenever an emergency happens!
What is an emergency fund?
The term “emergency fund” refers to money stashed away that people can use in times of financial distress. It’s your insurance policy against the unexpected. It’s a stash of cash that you keep in a safe place (i.e., not under your mattress or in your safe) ready to be used when something out of your control happens.
An emergency fund is there to protect you WHEN an emergency happens, not IF it happens. Because, no matter how prepared you are, unexpected things will happen in your life.
Some emergencies you can use the fund for:
- Car repair
- Emergency medical and dental costs
- Vet bills or pet costs
- Emergency home repair
- Boiler repair or replacement
- Tax bills / Legal bills
- Unemployment
How to build an emergency fund:
You have to calculate how much emergency fund you have to have each month. Many financial advisors recommend saving enough to cover anywhere between three to six months’ worth of expenses so you have to multiply those expenses to the months you plan on saving the fund for.
First, Calculate your essential expenses which may include:
- House expenses (monthly rent or mortgage, property taxes, home insurance, essential utilities)
- Transportation (car payment, insurance, gas, public transport)
- Groceries
- Health insurance, medical prescriptions
- Essential debt repayment (any high-interest debt repayments that you need to keep paying)
Then you have to cut back on your discretionary spending like eating out at restaurants, shopping for shoes/ purses, going out to drink with friends.
You can also start side hustles/ incomes to add to your emergency fund.
Read: Side Hustles for Nurses
Lastly, you may be tempted to think of a tax refund or stimulus check as extra money for discretionary spending. Instead, consider diverting it toward your emergency fund to give you an added financial cushion.
Benefits of having an emergency fund
1. It keeps your stress levels down
2. It gives you financial stability
3. It gives you peace of mind
Where should you keep your emergency fund?
You need to remember that an emergency fund is not an investment. It needs to be liquid (easily converted to cash), safe and easily accessible. I recommend placing your funds in a high interest yielding savings account. I have mine at Ally Bank and Capital One which offers 0.5%
The cost of having an emergency fund
Yes, having an emergency fund comes at a cost: every dollar you have sitting in a savings account isn’t invested. And if you have a big enough cash account, you could be losing big time.
But it is very important to have that insurance policy whenever something happens! The last thing you want to do is taking money from your IRAs when an emergency happens.
Ready to start building your emergency fund?
Download this Emergency Fund Calculator to see how much you should set aside for this fund!
Do you have an emergency fund? Do you think it’s necessary?
