Most of us learn about the benefits of planning at a young age. Studying for exams, scheduling events with friends and applying to colleges are common examples of planning ahead. As you get older, you’ll start to plan for things like your career, higher education and finances.
Keeping track of your financial assets is essential if you hope to afford necessities, achieve your goals and prepare for your future. However, no matter how carefully you budget your money, you never know when something unexpected will come in and disrupt your plans. While you can’t predict the future, you can prepare for unforeseen events by creating an emergency fund.
What Is an Emergency Fund?
Simply put, an emergency fund is a stash of money that is reserved to help cover unexpected events that affect your financial health. These events may include:
- Being terminated from your job
- A medical emergency
- Sudden auto or home repairs
- Monthly bill increases
- Unexpected travel costs
At the end of the day, certain things are out of our control. Say you plan to fund graduate school using money earned from your job. What happens if you’re suddenly fired? Similarly, say you have the precise amount of money you need to pay rent. What if your car breaks down, or a loved one suffers a medical emergency? You may need to suddenly siphon that money elsewhere.
If you don’t have an emergency fund, you might need to take out a loan or choose between two different needs. On the flip side, if you do have an emergency fund, you can simply dip into it to help pay for the unexpected event.
What Are the Benefits of Emergency Funds?
If you’re uncertain about making an emergency fund, consider these benefits:
- Emergency funds can lower stress: Unexpected repairs, medical emergencies and travel costs can be extremely stressful. Knowing how you’re going to pay for them can decrease that stress.
- Emergency funds can protect you from debt: In the United States, the average debt is $38,000. Having an emergency fund lowers your need to take out a loan, ultimately reducing the risk of debt.
- Emergency funds can improve your spending habits: Over 18 million Americans shop compulsively, or make purchases without thinking. Keeping extra money away in a fund can help prevent poor spending habits.
No matter who you are or how much you earn, you can benefit from an emergency fund.
How Much Should I Save in Emergency Funds?
Now that you know the benefits of emergency funds, you might be planning to make one yourself. This prompts the question: How much do I need to save? The fund amount depends on your finances — the lower your monthly expenses, the less money you have to conserve in an emergency fund. For instance, a parent supporting an entire family will typically need to save more than someone who lives alone. To determine how much you should save, consider the following:
- Your income: Those with lower income levels may not be able to save as much as higher-earning individuals.
- Your monthly expenses: This includes food, housing and healthcare costs.
- Number of dependents: This refers to the people that rely on your income (such as children).
In general, most financial institutions recommend that you save about three to six months’ worth of your overall expenses. To achieve this, try to save a small amount of money every week or so. Taking these small steps can have a big impact on your future.