A rainy day fund can keep you protected from much more than just a few raindrops. By saving for an emergency fund, you’ll be better equipped to deal with all the curve balls life might throw at you – from unexpected unemployment, to a sudden accident or injury, to property damage such as flooding or fire. Of course, saving money rather than spending it can be easier said than done. But if worst comes to worst and you do need an emergency fund, you’ll be extremely glad for any money you’ve managed to set aside.
To get you started, here’s a quick run-down on what an emergency fund is, why you need it, and how to get your own emergency fund up and running.
An emergency fund – the basics
An emergency fund is a pot of money that’s set aside for emergency use only. Under no circumstances can you dip into it, unless you are facing a genuine emergency. An emergency fund should be immediately accessible, which means it’s in cash or, more likely, a bank account that you can withdraw from at a moment’s notice.
Why have an emergency fund?
Sometimes, life is expensive and unexpected – and that’s where the emergency fund comes in. Having this kind of fund at-the-ready means that when something unpredictable occurs, you have a lot more options in terms of how you deal with the situation. For example, if a hurricane causes damage to your house and you’re living with a leaky roof, an emergency fund can help you get it repaired before your next pay check; curtailing any continual damage from an ongoing leak, and paying less in the long run.
How big should it be?
The size of your emergency fund is entirely dependent on how much you can afford to set aside, and how high your living expenses are. The emergency fund for a single 20-something with no car, who shares rent with a few roommates, will be very different from a four-person household with mortgage payments and high monthly food bills. Generally, it’s a good idea to have an emergency fund that’s large enough to cover three to six months of living expenses; but if this isn’t possible, having a fund of at least one month of living expenses is certainly a good start.
When to use the emergency fund?
Don’t confuse emergency expenses with surprise expenditures you haven’t properly budgeted for. Losing your job, chipping a tooth or getting into a car accident all constitute genuine emergencies. Finding a great pair of shoes on sale, or remembering at the last minute that you need to buy a birthday present for your significant other are, of course, not true emergencies – so don’t be tempted to dip into your fund.
Where to put it?
At its heart, an emergency fund is really just a good, accessible savings account. HUECU has a variety of savings accounts which make it easy to save for a specific purpose, such as starting and maintaining an emergency fund. An HUECU Money Market Account, for example, gives you high interest on the money you’re saving while still allowing easy access – so if an emergency comes up, you can access your funds quickly.
How to get started?
You can start building an emergency fund by cutting expenses and using the money you save as the first contributions toward your emergency fund. This might mean carpooling to save on gas, packing lunches rather than eating out, or reducing small daily purchases like coffee that can quickly add up. Or, start your emergency fund after you’ve received a lump sum of money, such as a bonus at work or a tax return. Starting an emergency fund is an excellent way to stop yourself from spending this money all at once, and put it to good use for the future.
Thinking long term
After a few months of growing your emergency fund, check how much you’ve managed to save and how far away you are from your ultimate goal. You might want to adjust how much you’re paying into the fund, or if you’re feeling confident about how much you’ve already saved, you can put those regular contributions toward a different kind of investment instead. With an emergency fund to keep you protected and other investments to grow your financial security, you’ll be ready to take on the future.
