I’m sure you’ve heard it a million times before, “you need an emergency fund.” If everybody is saying it, then maybe they’re on to something. Personally, I’ve never met anybody who hasn’t at one time or another had a financial emergency.
Unfortunately, most of those people didn’t have an emergency fund. That made them incur bills that they couldn’t afford to pay, go into debt with their credit cards and some even lost their homes, cars or taken money out of their retirement accounts (which by the way is a very bad idea if it can be avoided). Bad stuff always seems to happen at the worst time.
Things happen in life; quite often, those things require money to overcome. If you have the money to take care of these things, then you’ll have a lower risk of going into debt and losing your possessions.
If you don’t have the money, then more than likely, you’re going to have a hard time. Financial emergencies aren’t the only thing that emergency funds are good for; sometimes opportunities (which require money) arise. Being able to take advantage of more opportunities is another added bonus in addition to having financial security.
I never even had a designated “emergency fund” until last year, we had savings, but it was marked for other things. I have to tell you, it feels great! We might not have what others would consider a good amount in our emergency fund, but it’s a great place to start. In 2011, we were able to build up an emergency fund of $1,000; in 2012, one of our goals is to build that up to $2,000.
Once we got into the habit of putting money into our emergency fund, it sort of became a habit…and got easier over time. One of the things that helped me was setting up small transfers. Getting started always seems to be the hardest step to take, but once you take it, you gain momentum.
How much do you need in an Emergency Fund?
I’ve seen people recommend anywhere from $500 to 3-6 months of living expenses to up to 2 years living expenses. Honestly, I don’t think there is a magic number, because everybody’s income and financial situation is so different.
Really, if you can afford to have X month’s worth of living expenses saved in your emergency fund, then by all means go for it. If you can’t, then you’ll need to start smaller and work your way up over time.
If you don’t have an emergency fund at all, then why not start with a goal of $100? Sure it’s not going to be too helpful should a big financial emergency arise, but at least you’ll have something.
Then maybe, you could shoot for $500, and then keep going until you have your emergency fund to a number that you feel comfortable with. There’s nothing wrong with taking baby steps to reach your financial goals, you have to start somewhere.
Do you have an emergency fund?