Life in general is full of unknown factors or surprises, especially in the hard economic times we are facing. We have all heard about having some money easy accessible stashed away, but do you really need an emergency fund? Yes, you do! Well let me rephrase – You can’t afford not to have an emergency fund. You could get laid off tomorrow; you could have a new job offer, which requires you to move to another city. The car needs some major repairs etc. You don’t want to rely on credit to handle situations like that.
How much money do I need in my emergency fund? Well, opinions on that matter go from 1-2 months up to 8-12 months. Usually, I would recommend a healthy 2 month of what you’re currently making. In an emergency situation, that could probably keep you going for up to 4 months when cutting down on expenses. At the end of the day, you can never have enough money for a rainy day. If it’s more than a year’s salary – you should invest it. It would be wasted in a savings account with low interest rates.
How do I start? Just open a Savings account or CD with a bank and start depositing from your next paycheck. You have to make sure, that you can access the money at any time without penalties or waiting periods. When you start off, you want to get your emergency fund up as quickly as you can, so check your budget where you could save more money that you can contribute. Once your emergency fund is well funded, you pay a little less each month. There is no need for a card to be tied to that account, for me it would be too tempting to use it in an emergency, that not really is one (Apple releasing a new gadget, which I have not budgeted into my expenses). If you need it – you can wait until the branch of the bank opens.
Make sure you also reduce your spending, to avoid falling into debt, because of the emergency fund. If you are in debt that carries a high interest rate, you should still pay some money towards an emergency fund. Find other ways to cut down on your expenses.