Smart Reasons to Save, Use and Invest Money

The Importance of an Emergency Fund

EmergencyFund

The Importance of an Emergency Fund

I believe in the saying that we should always plan for the worst and hope for the best, and when you relate this to your finances it means having an emergency fund. An emergency fund is exactly what it says on the tin, it’s a source of funds where you can go to seek help in the event of an emergency.

Always expect the unexpected

You should always expect the unexpected when it comes to day to day life, as we never know what could be just around the corner. You should think of a financial emergency as either a sudden loss of income, e.g. loosing your job or an unexpected expense that’s unavoidable e.g. a burst water pipe at home.

If you don’t have an emergency fund

If you don’t have an emergency fund in the event of a financial crisis, then you may have to borrow money. Borrowing more money in this type of situation will only worsen your financial state; this is why having an emergency fund is so important.

How much should I put aside?

Emergency funds are often a hot topic of debate, but I believe that you should keep around 3 months worth of your personal expenses in your fund; this will depend on your own financial situation and how you much feel you will be able to comfortably save. The more money you add to your emergency fund the better as you should prepare for the worst. If you follow this method then all minor problems should be covered.

Make your fund work for you

Before you start your emergency fund you should ensure that you will be saving your money in the right place. Make your fund work for you by adding all your money into a high interest savings account. In the US a LSA or Lifetime Savers Account is one of the best ways to save. If you are UK based like me (this is a guest post, MoneyReasons is from the US), then the UK equivalent is the ISA rates account. Do your research and choose the best savings account in your local area. Make sure that you keep your emergency fund in an account that you can access quickly, so that you can withdraw money in urgent situations.

Get into the saving habit

When you start your emergency fund, it’s important to get into a saving habit so that you get used to it on a weekly or monthly basis. It will be difficult to start saving, especially if your aim is to save around 3 months of personal expenses, but start small and you will soon get used to it.

Set up some automatic payments

The easiest way to get in to the saving habit is to set up small automatic payments. Once you have opened up your savings account, set up a transfer of funds at set intervals from your normal bank account. Treat the amount you transfer as just another expense and you will soon forget about it. Once you are comfortable with the amount you are transferring, increase the amount slightly, repeat this process until you are happy with the amount you are saving.

Set up an emergency fund, and don’t let yourself get caught out by your own financial situation.

Guest post written by Andreas @ moneysupermarket.com

14 Responses to The Importance of an Emergency Fund

  1. I’ve read a few articles that talk about not needing an emergency fund, or investing your emergency fund in the stock market, so I was happy to see this article.

    With the economy as bad as it is, particularly the job market, I’ve increased our EM to 12 months of living expenses. It helps me sleep at night. I keep ours in and ING high yield savings account and have been happy with having our money there.

    Thanks for the post.

  2. Can’t stress the importance of having emergency funds. Stuff happens and you need to be prepared. And no money in CDs and money invested in the stock market shouldn’t count as EFs.

    • I definitely see your point! And I believe that an EF would be good if your liquid net worth is below a certain level for sure!

      I have what I’ve been calling peudo-EFs, basically it’s cash buffers in various account or low-risk stocks.

      A formal EF would be nice though, and I’d definitely recommend one too.

  3. I’m in complete agreement on the three month guideline. There’s a lot of talk about less, even as low as $1000, and while I think that’s a good start, it’s completely insufficient for today’s cost of living.

    Good job definining an emergency–it we tap an emergency fund for any imagined emergency, like a routine car repair or monthly budget shortfall, the whole purpose of the fund becomes meaningless. At that point it’s just an overdraft account.

  4. I don’t have an emergency fund, but I am in a unique situation. No debt (except small mortgage), and discretionary income. My line of credit supports extraordinary unplanned emergencies. Last, I want my money working for me. Is this right for everyone? No!

  5. I completely agree. Many people think that having a couple grand is enough but with todays economy and cost of living it just isn’t true. Kevin pointed this out as well.

    I think the best way to start a fund is just setting aside a percentage of your income or just dumping as much as you can. Either way as long you hit the mark you’re better insulating yourself from financial disaster.

  6. I distinctly remember getting a $200 speeding ticket in high school and crying because that kind of unexpected expense was devastating back then.

    Having an emergency fund means that when your car breaks down or your roof leaks, you don’t like it, but it’s not as upsetting anymore either.

    E-Funds provide sanity.