It might be a medical emergency or a family emergency, or something half-way in between.
But in any event, the emergency is a part of life. And you should always be ready for the unexpected and that means having some funds set aside for such.
Bottomline: It’s important that when a crisis strikes, you will be ready at least financially.
An emergency fund is sometimes referred to as a “rainy day” fund and is the money you save for those unforeseen circumstances.
While your budget is made up of everyday expenses such as groceries, housing, cars, and bills, your emergency fund is for those things you don’t anticipate in your budget.
So, when a life crisis happens, and it will, you need to have money stashed and someplace you can easily get to it to cover those unforeseen expenses. Keep in mind, this is not money you have set up in an investment. Instead, you’ll need to keep it liquid and available.
Also, note you don’t want to use credit cards or debt to get you through when your car breaks down or the heating goes out in the middle of January. That’s why having a rainy day fund to cover these difficult emergency events are crucial to your financial health.
How Much Do You Need in an Emergency Fund?
For the most part, when it comes to this type of savings, experts suggest having three to six months of living expenses readily available. Keep in mind this is all based on your monthly expenses.
What to Use Your Emergency Fund On
Here are some of the reasons and expenses you might need to tap into your emergency/rainy day fund:
Car problems: All of a sudden, your engine light goes on and it’s time to see what the issue is. Perhaps it’s something simple like new brakes but it could be more intense like a new alternator.
Medical emergency: You might be on a vacation and taking in the local landmarks or trying some of the native sports offered. Paragliding sounds great, but what happens if you miss the boat and you break an arm.
Job loss: It could happen at any time and for any reason – you’re fired, or the company has gone out of business. If either of these things happens, you will want to be ready to cover all your daily expenses. After all, it could be some time before you land a new job and the first check finds its way into your bank account.
Unexpected home repairs: Just when you thought you could get another year out of your washer and dryer both go on the fritz and its time to make a trip to buy both. Or, after 25 years of living in your home, the pipes go, and you’ve got a flood from top to bottom. Now what?
These instanced are perfect examples of when you might need to tap into that fund, however, some people don’t keep that much cash. If you’re one of them, then at least set aside some amount as your emergency fund.
The amount isn’t the most important factor. What is key is establishing the reserves for those unpredictable moments and making sure it’s enough to keep you from borrowing money. Without it, you’ll most likely end up in debt, and debt is a crutch for those who don’t know how to budget, experts say.
So, the point is: Do try and budget. If you are budgeting correctly, then you’ll be alright. Keep in mind to always put enough money back into the rainy day fund so you’ll be able to tackle head-on whatever life throws at you.