What is an Emergency Fund and Do I Need One?
There are constant changes in life and unexpected financial curveballs can hit us when we least expect them but could an emergency fund be a great buffer for you? Whether it's a sudden car repair, a medical emergency, or losing your job an emergency fund can help you massively in the short term. But what exactly is an emergency fund? In this piece, we explain what an emergency fund is, how much you should save for one, and much more.
What is an emergency fund?
An emergency fund is a financial safety net—a certain amount of money set aside specifically to cover unexpected expenses or financial emergencies. The best way to think of it is as your rainy-day fund, ready to help you when unforeseen costs pop up.
Do I need an Emergency Fund?
The short answer to everybody apart from the likes of Elon Musk and other billionaires is, yes, an emergency fund can be extremely useful. Without an emergency fund, you could find yourself trying to cover significant costs and then struggling to live from paycheck to paycheck. This might mean maxing out credit cards, taking out loans, or even dipping into your retirement savings, none of which work in the long term. An emergency fund gives you peace of mind and financial security, knowing you’re prepared for whatever life throws your way.
How Much Should I Save For My Emergency Fund?
Financial experts suggest aiming for three to six months' worth of living expenses in your emergency fund. This amount can vary based on factors like your monthly bills and job stability. It’s about creating a financial cushion that can sustain you through tough times without having your only choice as high-interest debt.
How Do I Build My Emergency Fund?
Starting small is perfectly okay, everybody starts from 0! It’s best to set a realistic savings goal and commit to it. Even putting away a small amount each month really can add up over time. A good way to have a consistent amount put away each month is by automating transfers from your paycheck to your emergency fund so you won’t even miss the money. You are able to categorise your finances and set up an emergency fund with money management apps. We have written a piece on some of the best money management apps currently available here.
Where Should I Keep My Emergency Fund?
Accessibility is key here—you want your emergency fund to be easily reachable when needed. A high-yield savings account is usually a popular choice because it gives you the opportunity to withdraw your funds quickly whilst also having the opportunity to earn some interest. It is best to avoid placing all of your emergency funds in investments that could fluctuate in value.
When Should I Use My Emergency Fund?
It’s important to distinguish between wants and needs early on. Your emergency fund should be reserved for true emergencies, for example, unexpected medical expenses, major home repairs, or essential car repairs. Think of it as something you can fall back on when it’s really needed.
Summary
Essentially, an emergency fund is not just a financial buffer; it can offer you financial stability and preparedness. Start building yours today, no matter how small the initial contribution. Your future self will thank you when you’re able to deal with financial issues with confidence. Remember, building and maintaining an emergency fund isn’t just about being financially responsible—it’s about taking control of your financial future and protecting yourself from the uncertainties life can throw at all of us. Start today, and watch your peace of mind grow along with your savings.
Here at the GLOSS Vault, we have made it our mission to help as many people like you across Australia and New Zealand feel in control of your money and ensure you’re getting the most out of it. To find out more about us and what we do click here. If you’d like to see our app in action for yourself head here!