COVID-19 has proven to be one of the worst pandemics of our lifetime and for some it has proven to be disastrous for their personal finances. Whether you personally lost your job, or were furlough from your company, or perhaps had an unfortunate event such as being hospitalized and not being able to work, the reality is that an emergency fund is more important than ever.
Life will always manage to challenge us in various & complex ways; therefore, understanding this will allow you to plan for future inconveniences that might arise. On the plus side, thinking about saving up for an emergency fund will allow us to continue saving money for a purpose. Let’s get started!
What is an Emergency Fund?
An emergency fund or “rainy day fund” is money set aside specifically for any type of unexpected events. The expectation is to have enough funds that will get you by, and cover your living expenses until you are able to recover from an unfortunate event. Some of these events include and are not limited to:
Losing your job
Medical emergency (e.g. paying a co-pay for your insurance)
Unplanned traveling (e.g. visiting a sick relative, death of a family member)
[Think any other unexpected event]
Historically, emergency funds have been in cash (e.g. keeping them in your house under the mattress); however, in my opinion you can always have this money in your savings account, or checking account if you need easy/fast access.
Did you know? 56% of Americans don’t have enough rainy day funds to cover for 3 months worth of expenses.
How much money should I save for my Emergency fund?
Most experts believe that you should save anywhere from 3-6 months worth of money to cover your living expenses; however, this depends on your own circumstances and needs. Personally, I’d like to have enough to cover for at least 4 months in the case of any emergencies. This will give me some time to remediate my situation and enough time to look and land a job if I were to be unemployed.
Coming up with your emergency fund
Start by estimating your costs for critical expenses such as the following:
You can use these articles I wrote to come up with your monthly expenses and break down those costs to an actual amount.
It’s important not to include any of your personal expenses such as entertainment, or going out, as these should not be considered essentials and will make it more difficult to calculate your emergency fund.
Start off small
I understand it might be difficult coming up with a savings account to begin with, and extra hard saving up for an emergency fund; however, we can start small with $30 each week. Below is an example of how much you’ll be able to save in a year (52 weeks).
In 10 weeks you’ll be able to save $300, and after 1 year you’ll be able to save up $1,560. Here’s a projection of your emergency fund growth.
year 2 you’ll have $3,120 and so forth.
Additionally, if you move these funds to a higher interest yield savings account, your money will continue to grow while you’re saving. To learn more about opening a savings account you can read this article.
The best way to accomplish this goal is to get started now!
Now you understand the importance of having an emergency fund for those “rainy days” which we’ll have to deal with as they occur. Understanding that the only constant in life is change will allow you to plan for unexpected events and allow you to get back to your feet faster. Additionally, you now have an idea of how to get started and how long it’ll take you to save for your own emergency fund goal.
Be proud that you took this important step as it will give you peace of mind and will set off the idea of saving for a purpose as it’ll motivate you to continue saving for your first home, wedding, education, etc.
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