Why you need an emergency fundFeb 17, 2023
COVID-19 was a huge wake-up call that life can be unpredictable and financial surprises can be lurking around the corner.
A survey by Bankrate found that nearly half of Americans have not saved money in case of an emergency and 64% have less than $1,000 available for an unexpected expense or financial surprise.
It’s clear from these numbers that setting up an emergency fund is essential for anyone wanting to gain some financial security and safeguard themselves against car repairs, home repairs, medical bills, and other unplanned expenses.
So why is it important to have an emergency fund?
The obvious reason is to cover those unexpected expenses—whether they're everyday expenses or unexpected events—but there's more to it than that.
Even if you are great at planning and budgeting (which is a minority among us), the unexpected will still happen!
And we don't know what specific event will occur — just that something will come along at the worst possible time.
So having access to cash when those events happen helps avoid financial hardship and the extra debt or awkward conversations with friends/family members.
Then there is the peace of mind of having some level of financial security.
And peace of mind can't be measured in dollars.
But how much should be in our emergency funds?
As a guide start with 2% of your salary. This is just a guide and just a start.
If you have kids, poor health, an old house or an old car or anything that could cause unexpected expenses then you would want to increase the amount.
Over time, it would be amazing to build this up to 3 months worth of living expenses. If the worst happens and you unexpectedly lose your job then you know that you're good for 3 months.
~ Scout Motto
When to use your emergency fund?
That's easy - only use them if absolutely necessary such as in health emergencies and other genuine situations where you have to make the expense now and don't have available money.
Going away for the weekend with friends is NOT an emergency.
If you can put off the expense to next pay or go without some things to cover it then do that. But don't use a credit card or get into extra debt.
Create a separate account and transfer a set amount to that account every pay - maybe 4% of each pay.
Set yourself a target - maybe 2% of your annual salary as a starting point.
When you get to the target you can stop the transfers and spend your extra money.
When emergencies arise simply dip into these funds but then make sure you fill it back up afterwards.
Doing this ensures being financially secure no matter what life throws at you.