How and Why to Build an Emergency Fund

With pressing financial goals such as buying a home, paying off debt, saving for college, and preparing for retirement, it can be easy to put building an emergency fund on the backburner. But a strong emergency fund can actually be instrumental in helping you achieve your other financial goals. Often times, the problem is figuring out how much you need to save, how to go about building an emergency fund, and how to build an emergency fund while also working towards other financial goals. Thankfully, there are a few strategies that can simplify the process. Here’s how and why to build and emergency fund.

What is an Emergency Fund? 

An emergency fund is a separate account that is used exclusively for major, unexpected emergencies—this could be anything from your car breaking down to losing your job. An emergency fund acts as a buffer during times of financial crisis and can keep you from going into debt. If you’re already in debt, an emergency fund can keep you from going into even more debt.

An important note is that an emergency fund should be reserved exclusively for emergencies. Using it for everyday expenses defeats the purpose of the account. Also keep in mind that it’s not always easy to build one, but it’s almost always worth it. Once you have a solid emergency fund, you can stress less and use your money more wisely. 

How Much Should You Save 

You’ve probably heard that an emergency fund should cover three to six months’ worth of expenses. Though this is a decent general guideline, the problem is that it’s too general. General financial goals rarely work well, since finance is often quite personal. In order to gauge how much you need to save, you should ask yourself the following questions:

  • What happens if you run out of money? For example, would you have to borrow money from your parents, or would your family become homeless? 
  • Do you have high interest debt? 
  • Do you have other accounts you can use in an emergency, such as retirement savings accounts? 
  • How stable is your job? 
  • How many sources of income do you have? Side gigs, dual income, single income etc. 

How you answer these questions should help you decide how much you need to save. If you have two, stable incomes, no high interest debt, a retirement savings account, and someone you could move in with if you ran out of money, you likely need a much smaller emergency fund. That is not to say that you don’t need an emergency fund at all, or that you would like the consequences of running out of money. However, you do have more options.

On the other hand, if you’re a family of five, have one income, are in a less stable industry, and have credit card debt but no other accounts, losing your job or an unexpected expense could have an incredibly negative impact on your entire family. 

Building an Emergency Fund

You’ve figured out how much you need, but now you need to figure out how to save that amount. When it comes to saving money, there are really only two options—increasing your income or decreasing your expenses.

If you have a side gig or receive a raise, you could put that money into building an emergency fund. This allows you to maintain your same standard of living while still building an emergency fund.

If you don’t have a way to increase your income, the best way to cut expenses is to create a budget. If you create a budget and figure out how much you can save, you can automatically transfer that amount into your emergency fund as soon as you receive it. That way, you won’t be as tempted to spend it.

Balancing an Emergency Fund with Other Financial Goals

It’s easy to focus on one financial goal and tell yourself you’ll worry about your other goals later. But financial goals don’t have to be all or nothing. Consider saving one month’s worth of expenses, then work towards other goals in addition to building an emergency fund. If you have high interest debt, such as credit card debt, paying this off should be your next priority. But if you have one month’s worth of expenses and no high interest debt, you can build your emergency fund while also working towards other goals, such as paying off lower interest debt or saving for retirement

Work with a Financial Advisor 

Now that you know how and why to build and emergency fund, if you still need assistance with this task, a financial advisor may be able to help. The team at Good Life Financial Advisors of Mount Pleasant is ready to lend a hand! One of our experience team members can help you create a holistic financial plan that includes how much to save in an emergency fund and the best way to go about saving those funds. We look forward to serving you!

Leave a Reply

Your email address will not be published. Required fields are marked *