Why You Should Have an Emergency Fund & How to Create One

Having an emergency fund can help you a lot, if you happen to encounter some unexpected expenses during your life. If you spend everything you get paid for, when something happens that requires money fast, an emergency fund can help you out.

Creating your own emergency fund can take some time, but it is worth it. Knowing you have something saved up for the rainy day, can help you several ways. Let’s dive right into it.

What is an emergency fund?

An emergency fund or rainy-day account is a savings account, that you save up some money to afford any unexpected expenses. It is important to have the emergency fund, at least partially in money form.

If you want to invest some of it, go ahead. Just keep in mind that if the need for money is now, that might not be a good place to sell the investments, if the markets are going through harder times.

I would say it is better to keep your emergency fund and investment account separated. Investing is for the longer term, but having an emergency fund is to cover any short term expenses that might occur. That is why it is better to keep it just in your bank account.

Why you should have an emergency fund

A few examples of why you should have an emergency fund: your car could break down, your phone could break. You could lose your job due to a global pandemic. Your house could burn down, your pet could require surgery, or anything that requires money fast might happen.

Having an emergency fund can relieve financial stress and that way help you sleep your night better. Knowing that you have some money saved up for expenses like that can keep you calm even during tougher times. I have a post about how to reduce financial stress as well, if interested, you can read it here.

The amount of money needed for an emergency fund depends on where you live as well as your lifestyle. More about that below.

unrecognizable person with umbrella on beach

How to create an emergency fund

Creating an emergency fund might not be easy for everyone. If your income is low and you are used to spending everything you have, putting ten thousand dollars aside might not be easy.

It can still be done. Starting small and paying yourself first when you get paid is a good way. Whenever you get paid, put aside 5 or 10 percent of your income. Even if your income is low, over time, the amount will grow.

The amount you should have in your emergency fund depends. You should aim for having at least 3 months of living expenses on your rainy-day account. Some say even as high as 6 to 12 months’ worth of expenses, but I know for everybody this is easier said than done. Aim for the 3 months’ worth of expenses at first, that is still better than nothing.

Saving 10% of your income for a year, that should cover at least one month’s worth of living expenses. So even if you started as small as 10%, you would reach 3 months’ worth of expenses in less than 3 years. That might seem like a long time, but it is better to start today rather than after 3 years. The sooner you start, the sooner you have it gathered.

Final words

Having an emergency fund can save you if unexpected expenses hit you. Whatever that is, having something saved up can be a big help. Even smaller amounts of savings can help, so don’t think that you make too little, or it will take ages. Everyone must start somewhere.

If saving even that 10% sounds hard, I have a post about thinking about money as time to save more. It can change the way you think about money and that way helps you save 10% or more every month. You can read it here.

Hopefully you get something out of this, have a nice day.

This is not financial advice.