You’ve always wanted to have one, but your financial obligations and the rising costs of everything nowadays keep you from doing it.
Until you just wake up one day thinking about all the time you’ve wasted and realizing just how much you need it.
We’re talking about an emergency fund.
What Is an Emergency Fund?
An emergency fund is money that you set aside to cover major and unexpected expenses.
These unexpected expenses include emergency visits to the hospital, major repairs of your car, home, or home appliances, or losing your job.
It’s a separate savings account that you can use to cover the expenses of these unforeseen situations.
It’s not considered a nest egg, or the money that you save for the future for your children’s college, your dream car, your dream vacation, or your own retirement.
An emergency fund is your financial safety net
that you should only tap into when emergencies or financial crises occur.
Why Do You Need an Emergency Fund in the First Place?
When you have your own emergency fund, you don’t need to borrow money!
The financial buffer of an emergency fund keeps you afloat in your time of need. You don’t have to depend on your credit card or even on the generosity of your friends and family.
When you have an emergency fund in place, you also don’t need to apply for high-interest loans.
How Much Should You Save For Your Emergency Fund?
It will depend on your monthly income, monthly expenses, number of dependents, and lifestyle.
The rule of thumb is to save at least three to six months’ worth of expenses.
It can be a huge amount, but if you put away money each week, you can easily save up to that goal.
You can always adjust the amount based on your financial obligations, family needs, job stability, and many other factors. Whenever you have extra money, you can always add it in to your emergency fund anytime.
Here are some tips that will help you set goals and start your very own emergency fund:
1. Chart your monthly income and expenses.
Write down how much money comes in and goes out every month.
Include recurring expenses, like groceries, utilities, insurance, rent or mortgage, childcare, and out-of-pocket expenses when you dine out, shop online, or watch movies and concerts.
2. Set your emergency funds goal.
An emergency fund should cover realistic living expenses for approximately three to six months.
If you have a stable income and substantial savings, you can set a lower savings goal.
If your monthly income is less secure, set up a higher but still realistic goal and start saving as soon as possible.
3. Develop a savings plan.
Your plan should include specific and calculable targets that you will work toward.
A specific target can be ?5,000 savings every month for the next six months to put into your emergency fund.
4. Make sure that your emergency fund is accessible.
The best place is in a liquid account where your money is easily accessible.
If you consider other options like mutual funds or money market funds, make sure that you know how to access your money should you need it right away.
5. Stick to the plan.
It’s easier said than done. But if you have realistic goals, sticking to them will be very easy.
A good way to do this is by setting up a systematic transfer to your emergency fund from your payroll, checking, or savings account.
If you’re still not sure how much you should put in your emergency fund, you can draw inspiration from the 50/30/20 Budgeting Rule, popularized by U.S. senator and bankruptcy expert Elizabeth Warren and her daughter, business executive Amelia Warren Tyagi.
Divide your after-tax income by allocating 50% on your needs, 30% on your wants, and 20% to your savings.
Make building an emergency fund one of your highest savings priorities. Just think: ?500 or ?1,000 every week in your emergency fund will grow it to ?26,000 to ?52,000 in a year.
That's usually enough to cover a major repair bill or an emergency trip!
Having an emergency fund can also protect you from the high cost of borrowing and keep you from being buried in debts.
We never know what the future holds, so the wise thing to do is to prepare for it.
An emergency fund will help you deal with what life brings, both the good and the bad. It will also help you achieve long-term financial stability.
Anyone can do it. You just need to have the right goals, a solid plan, and the right banking partner, and that’s none other than RCBC Savings Bank!