Having a financial safety net in the form of an emergency fund is crucial to achieving financial freedom. An emergency fund is a stash of money that you set aside to cover unexpected expenses such as medical bills, car repairs, or job loss. In this comprehensive guide, we will explain all you need to know about building your emergency fund from scratch and keeping it in check.
Why Do You Need an Emergency Fund?
The unexpected can happen at any time, and you don’t want to get caught off guard. An emergency fund serves as your safety net when financial crises arise – whether it’s a sudden job loss, an unexpected illness, or a broken-down car. Without an emergency fund, you will likely have to resort to taking on debt, which only worsens your financial situation and prevents you from working towards financial freedom.
How Much Should You Save in Your Emergency Fund?
The rule of thumb for emergency funds is to save at least three to six months’ worth of living expenses. However, this amount can vary depending on your financial situation. If you have dependents or are self-employed, you may want to save more than six months’ worth of living expenses.
Where Should You Keep Your Emergency Fund?
Your emergency fund should be kept in a safe, easily accessible place that earns you a decent amount of interest. A high-yield savings account or a money market account that offers a decent interest rate is a great option for your emergency fund. Avoid putting your emergency fund in stocks or risky investments that could lose value quickly.
When Should You Use Your Emergency Fund?
The main purpose of your emergency fund is to help you through a crisis or unexpected expense. However, you should use your emergency fund only for real emergencies and not to fund non-essential expenses. Using your emergency fund for non-emergencies puts you at a higher risk of running out of funds when you need it the most.