An emergency fund is just that: a fund for emergencies. By “fund,” we mean a stash of money you set aside as a financial safety net for when life throws you a curve ball. And let’s face it, we’ve all had one of those thrown at us lately. There are several good reasons for having an emergency fund. To start, it can help lower your stress levels. If you don’t have some sort of financial safety net, it’s highly likely that when you’re faced with an unexpected change in circumstances, or even worse, job loss, you’re going to feel anxious. Knowing you have emergency cash on hand can help ease your anxiety.
Having a safety net can also prevent you from spending your money on a whim. In other words, don’t use your day-to-day bank account for your emergency money as it will be way too easy to spend. By directing some of your pay into a separate account on a regular basis, you won’t be tempted to splurge it all on a night out. Better yet, you will be surprised by how much you can save even after a short time when the money is moving automatically from your spending account to your savings account.
If you don’t have some sort of financial safety net, it’s highly likely that when you’re faced with an unexpected change in circumstances, or even worse, job loss, you’re going to feel anxious.
Everyone’s situation is different, so it makes sense that the amount you put aside depends entirely on your circumstances. There is, however, a general rule that says three to six months’ salary is what you should aim for when it comes to your emergency fund. This is another major benefit of having such a fund: it allows you to live securely without an income for a period, giving you time to get back on your feet and find a new income source.
Keep in mind it’s never too late to build your emergency savings. Have a look at your expenses and work out where you can cut back to start saving on a regular basis. If you don’t make saving a regular habit, you likely won’t be successful in building an emergency fund.
When it comes to where to keep your emergency savings, there are several options. Cash is the most obvious and is easily available (just don’t keep it under your cabin bed, of course). As well as regular savings accounts, money market funds — mutual funds that invest in very short-term securities — are also popular. As with any decision regarding money, it’s wise to do your homework and seek advice if you feel overwhelmed or lost. The most important thing, however, is to start building your safety net today.
This column is taken from the July 2020 issue of Dockwalk.