Many people are starting to build emergency funds to help them prepare for the worst-case scenario. Whether this be losing a job, your start-up business not going as planned, or an investment turning out to be unprofitable. No matter what the situation, it is always a great idea to have an emergency fund set aside for you to live off of if you are ever put in a difficult financial situation.
What is an Emergency Fund?
An emergency fund is money set aside in a savings account that remains untouched unless you are in a financial crisis. If you are ever put in a position where you can no longer pay your bills or a medical emergency happens, this money will be there for you to fall back on. Many people find that an emergency fund gives them a peace of mind knowing that when all else fails, they will be able to make their required payments each month.
How Much Money to Have in Your Emergency Fund
The amount of money you set aside for a potential rainy day will depend on your current financial situation. If you are debt-free, you are ready to start building your emergency fund. If you are still working to pay off your credit card debt and student loans, you will need to take other steps first.
What to Do If You Are Currently in Debt
If you still have a great deal of debt to pay off from credit cards, student loans, or unsuccessful business deals, it is recommended that you start out with $1,000 and focus on paying off your debt. You can deposit $25 to $100 dollars into your emergency fund savings account each month while you are still paying off your debt. Remember, something is always better than nothing when it comes to having an emergency fund. However, you may not want to focus on the “what-ifs” when you already have debt to pay off each month.
What to Do If You Do Not Have Debt
If you do not have debt to pay off each month, you are in a great position to put aside a substantial amount for an emergency fund. Typically, it is recommended that you save three to six months of living expenses. These expenses are all of your monthly bills, the cost of food, transportation costs, and other personal expenses. It is up to you to decide if you would like to set money aside for clothing, dining out, and entertainment in your emergency fund. To understand how much you need to save, add up all of your living expenses from the past three to six months. This figure will be how much it is recommended that you set aside. Once you get this figure calculated, make deposits into your emergency fund savings account each month to eventually reach that amount.
Money For an Emergency Fund
No matter what your current financial situation is, you should try to set aside some money for your emergency fund. Even if this means putting $10 per month towards this savings account, it could be very beneficial one day. Building your fund gradually will help give you an ease of mind knowing you have some money to fall back on.
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This article is for informational purposes only. Please be advised that this article is not intended as legal or tax advice. PPG-139592 (11/19)(Exp. 9/20)