Today, I’ll be talking about the importance of keeping an emergency savings fund, and how to develop one.
An emergency fund is, in short, is keeping money aside in either physical cash or in a liquid, easily accessible account, so you can access it in case of an emergency. Having an emergency fund is extremely important because it allows you to prepare for the worst, meaning if you're in a situation where you no longer have an income or money becomes tight, you don't have to worry about the essentials.
Say, for example, you lose your job. By having an emergency fund, you can live normally while you search for another job, despite having significantly less money coming in.
An emergency fund is usually a set amount of money that is dictated by your expenses. A good goal is to have 3-6 months of essential expenses saved up. This means you can go 3-6 months without any additional money, and still live relatively normally.
How do you determine 3-6 months of essential expenses? First, let's define an essential expense. An essential expense is anything you absolutely need in order to live. This includes food, utilities (water, heat, electricity, etc), housing (rent/mortgage), or medication. In other words, if you were to live without these items, your life would be either impossible (without food/water/medication), or extremely uncomfortable (housing).
Anything that isn't absolutely necessary to your everyday life falls in a different category, which I’ll discuss in a future article. This includes shopping, eating out, and travel. There is also a grey area, for expenses that are very important to everyday life but aren't essential to living, like wifi, or your phone bill. If you're able to, incorporate expenses like these into your emergency fund. It'll make things just a little bit easier in case something goes wrong.
While you can guess your monthly essential expenses, the safest bet is to actually calculate them. To do this, save all your grocery receipts, medication costs, and utility bills for one month, and take note of your monthly rent/mortgage payment. Add up all of these numbers, and you'll get one month's worth of essential expenses. Multiply this number by, say 3, if you want 3 months' worth of savings.
Because your expenses are likely to vary from month to month, meaning one month may be lower or higher than the next, your one-month estimate may be inaccurate if you simply multiply it by 3, or 6. To get a more exact number, you'll have to track all of your essential expenses for the exact time frame of your savings account. If you want 3 months' worth of savings, try tracking 3 months' worth of expenses. This can be tedious, but it’ll help get rid of inaccuracies that you may find when tracking only 1 month of expenses.
The next step is to start adding money to the fund. Establish a regular goal, like contributing $50 every single paycheck. Make it realistic, so you don't have to inconvenience yourself to save. Once you hit your goal, let your money sit. This might be the most difficult part. An emergency savings account is only for emergencies, so don't treat it as cash that's just sitting around. Try not to withdraw from it at all, in fact, the best way to not touch your emergency savings is to pretend it doesn't exist (don't forget about it though).
Establishing an emergency fund is an important step in developing financial stability. Having emergency savings will allow you to continue living somewhat normally in the case of an unpredictable event. Start by calculating your essential expenses, and then setting a goal. Good luck, and happy saving!