What is an emergency fund?
In short, an emergency fund is a pile of money (not literally) set aside for the unexpected events that happen in our lives. As stressful and sometimes costly as these events can be, there is no avoiding them. Sadly. Also, before I forget – This is NOT a savings account. The two are distinctly different. It’s called an emergency fund for a reason, use it for emergencies only.
Flat tire on your way to work? Emergency fund.
Basement flood overnight? Emergency fund.
Recently let go from your dead end job? Emergency fund.
How much should I save?
Good question, the short answer is… I can’t tell you. Not because I don’t want to (I wish I could) but because everyone has different expenses. That being said, the smart people over at Vanguard recommend saving 3-6 months worth of expenses as your emergency fund. Since I tend to err on the side of caution, I’d prefer the 6+ month fund. It is important that you don’t save too much over that 6-7 month threshold though. That money that you are saving could be used more productively by paying off any debt or investing.
An emergency happened, now what?
So life threw you a curve ball huh? Sorry to hear that. Good thing you saved up 3-6 months worth of expenses and can cover the financial costs with your emergency fund! If an emergency does occur, it is important that you replenish your fund as soon as possible. Life has the tendency to hit kick you while you’re down. Make sure you’re prepared.
So what’s the point?
The point is security. You need to be able to tackle the financial randomness of life without putting yourself into debt. If you haven’t noticed already, I am a huge opponent to debt. Debt should be avoided at all costs especially if your goal is to be financially independent. I will save that rant for another post, but you get the gist.
Like most things, the hardest part about personal finance is starting. Once you get going, building up your emergency fund will become habitual. With the information provided in this post and on this blog, you should be well on your way to becoming financially independent. You can also follow us on Twitter and Instagram to stay up-to-date with all things ALB. Get going!