Life is full of surprises. One day we're making ends meet with a little something left over, then out of the blue something pops up to change all that. To guard against the unpredictability of day-to-day living, it helps to have a 'safety net' in place. An emergency savings fund can save you countless hours of worry over finances at a time when you're already worried about other things.
What is an emergency fund? Simply put, it's a certain amount of money that's set aside specifically to cope with situations that cannot be foreseen. Whether it's an illness in the family, an accident, major car repairs or a natural disaster, such tragedies can quickly deplete a bank account and lead you straight into financial calamity. And make no mistake, unforeseen circumstances can happen to anyone and everyone. No one is exempt from them. The best that we can do is to prepare in advance so that if we're ever faced with a trying situation, we don't have to be focused completely on money.
How much money should you have set aside in an emergency fund? Well, the general rule of thumb is that you should build up a reserve that's roughly equal to several months' worth of your income – ideally, at least three months' worth of total household income is a good amount to have stowed away. Yes, that's a lot of money. When you add up the income of every jobholder in the house, we could be talking about $10,000 or more. Certainly, it's hard for most people to save even a small amount of money, let alone that much.
But don't let that paralyze you into doing nothing. Starting anywhere – wherever you presently are financially – is infinitely better than not starting at all. If you can manage to save even $25 a paycheck, then do it. Sure, it will take a while to build up an appreciable fund, but you'll still have money put aside in the event that something happens.
Your emergency fund should only be tapped when your regular finances can't handle the strain of an incident. It's not to be used because we're living above our means and overshooting the budget every month. But, then again, if you're living beyond our means, you probably won't have any money to contribute to an emergency fund.
One way to build your emergency fund when money is low is to earmark for saving any bonuses, raises and tax refunds you get. Instead of buying extra goodies with that money, take it from your check immediately and add it to what you're already putting away. Think about it; a tax refund will build up your fund pretty quickly.
An emergency fund saves headache. Major car repairs can set you back several hundred – if not several thousand – dollars. An emergency fund will protect you from having to choose between getting your car back and keeping the electricity on. And when a loved one is sick, you can concentrate on taking care of them without having to think about how you're going to pay the bills. So, if you don't have one, start an emergency fund today, and encourage the entire family to help out. Whatever you can contribute will be good. While you're building a cushion against possible emergencies, you'll also be teaching them to save money, and that's always a good thing.
