Your Emergency Fund and YouSubmitted by Younity Wealth Partners on June 23rd, 2017
Updated: June 23rd, 2017 by Kara Downing, CFP®
Summer’s finally here. The sun is out, it’s warm, the days are longer, and your worries seem just a little bit further away. But, folks, I’m sorry to say, sometimes storms roll in on the sunniest of days. So instead of purchasing a bunker and preaching the end is near to your entire social media following, prepare for the uncertainty with an emergency fund.
What is an emergency fund? An emergency fund is an account used to set aside funds needed in the event of a personal financial dilemma, such as the loss of a job, a debilitating illness or a major expense. The purpose of the fund is to improve financial security by creating a safety net of funds that can be used to meet emergency expenses as well as reduce the need to draw from high interest debt options, such as credit cards or unsecured loans. The old saying ‘failing to prepare is preparing to fail’ comes to mind when thinking about the importance of an emergency fund. It’s not necessarily top of mind when payday arrives, however contributing to your emergency fund should feel as urgent as paying off monthly bills.
So how much should you contribute to your emergency fund?
As daunting as it might seem, it’s recommended that you save 3-6 months of living expenses in your emergency fund. In the age of the internet, many financial institutions have calculators available to estimate the amount you should keep. In fact, Nerdwallet has a fantastic resource breaking down your monthly expenses to deliver a 6 month estimate of how much you should save.
If you’re at the beginning of your journey to creating an emergency fund, where should you start? Set monthly goals and stick to them if you can. Cut back on things that could be considered luxuries, and remember that one day you might be thankful your emergency fund exists.
Once you start to build your rainy day fund, it’s critical to remember what an emergency really is. It is not a vacation - as much as I wish it was - it is not a new wardrobe, or even a new television. It truly needs to be allocated to emergencies.