Last Updated on April 8, 2016
First, let’s go over a quick definition of an emergency fund. When I use those words, I’m simply referring to an amount of money that you’ve set aside in the amount of somewhere between $3,000 and $10,000 dollars.
This money usually stays in a savings account and is left alone for unexpected expenses or a truly “rainy day” where you’re in a situation that requires you pay a large sum of money. The “emergency” tag doesn’t necessarily mean life-threatening or disastrous, but rather an unforeseen interruption in your cash flow.
Now, being able to establish one does take, discipline, careful planning and above all, time. Being able to save close to $10,000 dollars might seem impossible for some people, but know that it can be done.
Understanding some of the benefits of having an emergency fund are important motivating factors when and if you decide to start establishing one.
What I want to do here is cover the three most prevalent and basic elements of an emergency fund, that will give you the beginning push and incentive to start setting money aside. Building up your savings this much takes time, but knowing the importance of it will definitely motivate you to start the process.
An emergency fund fireproofs your cash flow. — Having an emergency fund that is even just $5,000 dollars means you’ll have enough money set aside to be sure that even large unforeseen expenses will have little or no effect on your weekly cash flow.
Say for instance that you have a several thousand dollar repair on your car that you weren’t anticipating. With the money to pay that out of pocket set aside, your weekly cash flow will go on uninterrupted, and after the car is paid for, you can simply pay back your emergency savings over time, interest free.
It saves you from possibly having to go into debt, or be short of cash for a few weeks.
An emergency fund is the better credit card. — Borrowing money from your emergency fund is a much safer and more practical option than putting in on a credit card. As I’ve already mentioned, interest is a non-issue since you’re simply borrowing from a savings account. It’s also far less addictive to borrow money from yourself, since you’re acting as both the lender and the borrower.
It’s also worth noting that most credit card limits are somewhere between $5,000 and $10,000 dollars. Perhaps your credit card limit is a good number to shoot for when planning how much to contribute towards your emergency fund? It’s just a thought.
An emergency fund can safeguard you against losing your job. — Once your emergency fund is established, you’ll typically have enough to pay somewhere around three months worth of expenses. This means that if you were to lose your job, you would have that much time to find another one before you had to worry about your cash flow running out.
Three months is plenty of time to spruce up your resume and get back to work, even in a tough economy.
Try to plan for your emergency fund to cover at least two months of expenses for you and your family; four or five would be optimal.
It’s not easy to get into the habit of saving money, but having an emergency fund that can provide a firewall between you and unforeseen financial disasters makes it well worth your effort.
Keep in mind too, that once you reach your emergency fund threshold you can keep saving and use that money for fun things, or for investments. Being financially stable isn’t about restriction, it’s about freedom, and an emergency fund is a huge contributor to that freedom.
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About The Author
Jenny Sampson is a professional blogger that enjoys providing consumers with personal finance advice. She writes for TitleMax.biz, a leading Title Loan company offering bad credit loans.