No matter how hard we might try, we can never fully predict what’s around the corner. Emergencies are a fact of life, and so emergency funds are an essential safeguard for all of life’s unexpected turns.
Over the course of our lives, there will be plenty of unexpected events that will throw our day-to-day plans into disarray.
Even in investing, where we spend hours and hours analyzing every possibility in the hope of accurately predicting the market, we can never be fully sure of the future.
These emergencies could mean losing your job, having a medical crisis, or even a leak in your roof—something that’s actually happening to me right now!
Why Do I Need An Emergency Fund?
All of these unexpected events can cause a huge amount of stress, made worse by the fact that the majority of us don’t have the money to set aside to deal with them. A recent survey showed that 62% of American’s don’t have $1000 saved—21% don’t even have a savings account!
If you’re one of these people, you’re living on the ‘financial edge’, and that’s not good. Without savings, unexpected events could force you to take out high-interest debt through credit cards or payday loans. If you have to do this, an emergency situation will become a whole lot worse as you fall into debt!
But an emergency fund is essentially a stash of money set aside to deal with unexpected expenses.
How Much Should I Save For My Emergency Fund?
This will depend a lot on your personal situation. Most advisors suggest somewhere between three to six months worth of expenses should be allocated to your emergency fund.
Others err on the side of caution and recommend a year’s worth.
This is usually based on the average time it takes to get a new job should you be let go or made redundant – one of the most common financial emergencies.
Really though, it’s up to you. An emergency fund is there to give you peace of mind and protect you from the unforeseen.
If you are in a very stable job or feel you could get a new job easily, you may choose to save a little bit less. Similarly, if you have adequate health or home insurance, six months may be a bit excessive.
However, if you have a lot of personal debt, or high fixed expenses (like mortgage repayments), you should aim to save a little more to give you more breathing space should the worst happen.
Where Should My Emergency Fund Be Kept?
An emergency fund needs to fulfill two criteria to be effective—it must be easily accessible and safe.
An emergency fund is there for emergencies. This means that you’ll need it at short notice, and you’ll want it to all be there. Unfortunately, this rules out the stock market as an option to keep your emergency fund in. Emergency funds will need to be accessed almost straight away should an unexpected situation arrives, and you don’t want to have to sell your investments in the middle of a downturn.
The best place for these emergency funds is either in a traditional savings account or a money market fund.
This way the money is easily available and protected from market swings.