Updated: Mar 1, 2021
Financial freedom does not come easily for most of us; we have to work at it. But there is some good news! Building up an emergency fund will give you more freedom than you might expect. Almost all financial experts recommend having at least 3 months of regular expenses set aside for an emergency. That may sound like a lot, but it’s easy to get there by following this guide.
What is an emergency fund anyway?
Think of it as an insurance policy you give yourself. An emergency fund should be set aside and only used in an…emergency. Take a look at your finances and ask yourself, “What if I lost my job tomorrow?” or “What if my car breaks down?” or “What if the earth opens up and swallows my house?” Yes, that can happen. Unfortunately, homeowner’s insurance won’t be any help if you are suddenly unemployed, and if that happens it’s imperative that you can cover your expenses without using your credit card and taking on unnecessary debt.
So how do you start an emergency fund?
Many finance professionals will stress the importance of paying yourself first. You need to prioritize this! Before anything else, take 10% of your every paycheck or income you have and put it in a savings account. Can't do 10%? Try 5% or 1%, whatever you can manage. You are paying yourself after all. If you can set this up to happen automatically then you are living on easy street. If you can send those automatic deposits to a high-yield savings account, now you’re a rock star.
But what about all my credit card debt?
Okay, paying down credit card debt is important, and you should do it…after you have your emergency fund set up. Think about where credit card debt comes from. Most people use credit cards to pay for things they cannot pay for with cash. If you already have a mountain of credit card debt, not having the cash on hand to cover unplanned expenses means you have THREE things to worry about instead of one: the emergency itself, plus not being able to afford it, plus your growing debt. Now, depending on your situation, it may make sense to reach for the credit card to pay off an emergency expense. But, data shows this is not the case for many adults.
Why should you even bother?
You need to expect the unexpected. An emergency fund will ensure you are covered no matter what comes your way. It will prevent you from making unwise financial decisions. There are some ‘hidden’ benefits as well. Having an emergency fund will keep your stress levels down. You will find yourself not worrying about money all the time. And, when that emergency does come up (hint: it will) you only have one thing to worry about.