“Something is going to break in your house every year that is going to cost you money” This is a saying I heard and if there is any truth to this, the sooner you are prepared to handle such expenses the better. The best way to prepare for this is by setting up an emergency fund.
An emergency fund is a key component of a solid financial plan and it is wise to prepare as much as you can for life’s unexpected events from job loss to replacing a broken washing machine, so instead of getting into debt or relying on a credit card an emergency fund can save the day.
An emergency fund is an amount of money set aside for unexpected expenses, thereby minimising the impact of these events such as Job loss, house repairs, car repairs, home appliances replacement or repairs e.t.c
Situations like these need to be handled and while they are stressful having money makes dealing with the situation much easier.
Like I always say personal finance is personal, to answer the question will depend on your situation but for most people the answer will be yes even though the amount needed will vary
Insurance and warranties is also another way of dealing with emergencies because you are protected.
Personally, you need a balance between the type of insurance premium you want to pay and the amount of emergency fund you need or if you need one at all
Your current situation and type of job would also inform your decision.
For most people, an emergency fund is needed to;
When life happens which is our definition of an emergency, it affects our wellbeing and health by causing stress especially if you are without an emergency fund
With an emergency fund, you are confident to tackle unexpected events when they happen without adding money worries to the mix
Debt should not be considered normal, but without an emergency fund you are likely to make debt normal
With an emergency fund, you won’t rely on credit cards or high-interest loans
When saving for an emergency fund it is best to do so monthly thereby creating the habit of saving and trust me it’s valuable.
Most people don’t think of saving but spending and getting into the habit of saving will place you in a better situation than most people
You could also have a separate account known as Sinking funds to save up for other financial goals.
Building your emergency fund can be an ongoing process, done alongside other financial goals like retirement savings
Because of the nature of emergencies, there are some characteristics you want to watch out for in an account to house your emergency fund.
These characteristics are
These characteristics will help us pick the right account to keep your Emergency fund
Remember the purpose of your emergency fund when you’ve reached the goal.
Keep the purpose in mind and only dip into that account when needed, it could be in a year or 10years but when it happens you will be glad you have that pile of cash at hand
A vacation or sale isn’t an emergency, a sinking fund is better suited for that
It’s your cash so be honest with yourself about what an emergency is and don’t dip into the account if it’s not.
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