What to Know about Emergency Funds

 What to Know About Emergency Funds

By: Emma Williams 

An emergency fund is something that everyone should have because you never know what might come your way in life. This is a fund that you build overtime, so that you can use it in case of an emergency down the road. An emergency fund can protect you from falling into a bad place financially when you encounter life events that you had not planned for in your budget. When starting an emergency fund, there are key things that you need to know. The first thing to know is some reasons as to why you may need an emergency fund such as an unexpected medical bill. Another thing you need to know about emergency funds is how to actually build this fund. Most people do not know how to start, so they end up putting it off until the time comes when they actually need it. Lastly, you need to know when to actually use this fund. Many people may end up using it incorrectly, which can lead to more financial stress down the road. 

The first topic that needs to be considered is why it is actually important to have an emergency fund. A major reason to have an emergency fund is if you only have one source of income. According to The Balance, if you only have one source of income, you need to have this fund in case of a job loss or if you get an illness that prevents you from working. Another great reason to have an emergency fund is if you are young and just starting to budget your money. When you first start budgeting, you are likely to leave some of your expenses unaccounted for, so your emergency fund could help you in those situations for the first year while you are establishing your budget. According to Bankrate.com, 1 in 4 Americans indicated that they have no emergency fund savings at all, which can be detrimental to them because if they suddenly lose their job, they have no cash flow, and nowhere to turn if they are short on money since they never established an emergency fund.

The next important thing to know about emergency funds is how to actually build this fund. If you are struggling financially, then it may seem impossible to start, so knowing a couple ways to build up this fund may make it seem less difficult. According to ConsumerFinance, the best thing to do to start building your emergency fund is to set a goal for how much money you want to put aside every month or pay period. By creating this goal, you will stay motivated to actually attain that goal, and your emergency fund will thank you for it. If you aren't sure how much you want to have in your emergency fund, experts recommend having 3-6 months worth of living expenses such as food and housing. Another tip for creating your emergency fund is to have a system for making consistent contributions to this fund. This can be by having automatic transfers, or by setting aside a certain amount of cash. You want your contributions to be the same amount every time, but if you can afford to put a little extra towards this fund, then you will watch it grow faster. 

The last important thing that you need to know about an emergency fund is when to actually use this fund. If this fund is used incorrectly, then you may not have enough money when it comes time to pay for a true emergency. Some examples of using this fund incorrectly are to upgrade your phone, upgrade your wardrobe, vacations, or to lend money to someone else. These are incorrect ways to use this fund because these are not needs, they are wants. You don't need a new phone, so it's not a wise idea to spend an emergency fund on that purchase. You have taken time to create this fund, so you owe it to yourself to spend it when absolutely necessary. A perfect example of when to spend this fund is to cover living expenses after losing a job until you can get a new one. This is why experts recommend having three to six months worth of living expenses in your emergency fund because after a job loss, it can take anywhere from three to six months to find a job again. Another good way to spend an emergency fund is on car repairs after an accident. This is something you would want to use your emergency fund for because it is an unexpected purchase that was not planned for in your budget, and a necessary purchase so that you have a way to and from places such as your job. 

Works Cited

Caldwell, Miriam. “8 Reasons You Need an Emergency Fund Now.” The Balance, The Balance, 20 Oct. 2021, https://www.thebalance.com/reasons-you-need-an-emergency-fund-2385536/.

“An Essential Guide to Building an Emergency Fund.” Consumer Financial Protection Bureau, https://www.consumerfinance.gov/start-small-save-up/start-saving/an-essential-guide-to-building-an-emergency-fund/.

Foster, Sarah. “Survey: More than Half of Americans Couldn't Cover Three Months of Expenses with Emergency Savings.” Bankrate, https://www.bankrate.com/banking/savings/emergency-savings-survey-july-2021/#:~:text=More%20than%20half%20of%20Americans%20(or%2051%20percent)%20have%20less,from%2021%20percent%20in%202020.

Irby, LaToya. “A Quick Guide to Using Your Emergency Fund.” The Balance, The Balance, 17 Jan. 2022, https://www.thebalance.com/when-should-you-use-your-emergency-fund-453900.