Having an emergency fund decreases my stress because I know I have money in case of an emergency and lets me stick to my savings goals even when times are tough. Even with a good budget unexpected events happen.
An emergency fund must be easy to access and large enough to support you through a short period of difficulty. This could vary from job loss to poor health to a family crisis to any other challenge that you encounter. What they have in common – they would have a negative impact on your finances. An emergency fund will reduce your financial stress and decrease your dependence on credit cards when times are tough.
There is no downside to building an emergency fund. The most you will lose is investment income. However, there are many good high interest savings accounts that will give you a risk free return.
Set up your emergency fund in three steps:
- Add up the last few (somewhere between 3 and 6) months of spending – this is the target size.
- Set up a separate account or subaccount (tangerine lets you do this). I keep mine in a high interest savings account.
- Direct half your weekly/bi-weekly savings into your emergency fund until it reaches your target. If you need to take out money for an emergency repeat step two until it is replenished.
After creating your emergency fund when do you use it?
Only for true emergencies – holidays, dinner with your friends, or anything else that is a fairly predictable expense is not an emergency. On the other hand something like being laid off is exactly the kind of unexpected event where your emergency fund can help. With all the stress, upset, and uncertainty that being laid off brings you will be able to withstand it financially. And when you go back to work you wouldn’t have credit card debt hanging over you.
So don’t wait until you need it – start now and be prepared.