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Why You Absolutely Need an Emergency Fund (Here’s How to Get Started)

Donald Wee
WRITTEN BY
UPDATED
November 25, 2021

What makes the world go around? Some say love, others say gravity, but the fact remains that we live in a materialistic world. Money matters!

 

Sadly, it’s also a world fraught with uncertainties. This can be hugely stressful, especially when it comes to issues like job security, health, and other things beyond our control.

 

Losing a job or getting sick can affect our income stream, which makes it a good idea to have some emergency funds squirreled away for a rainy day. If disaster strikes, you’ll definitely thank yourself for the foresight of preparing some extra cash.

 

Here’s what I’ll cover in this article.

 

 

What Are Emergency Funds For?

 

Life is full of surprises

Life is full of surprises.

 

In its simplest form, an emergency fund is a pool of cash to help tide you through an unexpected event.

 

For example, when:

 

  • Your car breaks down and needs repairing.
  • A family member needs urgent medical treatment.
  • You lose your job and need to cover your living expenses for the next 6 months.

 

Ideally, you want enough in your emergency fund to tide you over until things start to improve.

 

Of course, it’s impossible to be prepared for everything. You never know what curveball life will throw your way! But keeping a sum of extra cash safely tucked away is always a good contingency.

 

An emergency fund is especially critical if you have lower job security. For example – freelancers and small business owners, who rely on a variable monthly income. The higher the unknowns – the more important it is to ensure you have a safety net in place!

 

On top of that – having a dedicated fund is a much better alternative than relying on credit cards or loans when you need emergency money.

 

If disaster strikes, and you need to rely on credit, you run the risk of debt that keeps snowballing. The last thing you want is to get stuck in a vicious cycle of paying off debts, only to accumulate more.

 

 

How Do I Start An Emergency Fund?

 

While it’s best to start building up your fund as early as possible, it’s never too late to get started.

 

You can get kick things off in 3 simple steps:

 

Step #1: Set your expectations for your emergency fund

 

First – start off with a goal for your fund. This will keep you focused. For instance, your goal may be to accumulate a fund that will allow you to survive for 3 months without income.

 

This ‘goal’ can be thought of as the amount of money needed to survive for a certain period, while still having enough to lead your current lifestyle. That should include paying utilities, loans, and bills.

 

Reaching this goal is possible with a little planning, but just know that will take time to build.

 

Be prepared to also hit setbacks. Life happens. You may start saving, and need to dip into it a few weeks later because of medical emergencies or accidents.

 

Just be mindful to replenish what you have used up as soon as you can, so you can get back on track as quick as possible.

 

Important Tip

Don’t treat your emergency fund like a cookie jar! You shouldn’t dip into it to handle the expenses of going on vacation, doing a planned medical procedure, or buying something that you want – all of which are things that should be saved for separately!

 

 

Step #2: Determine the size of your emergency fund

 

You will find that most advice from financial experts would recommend a fund of between 3-6 months.

 

However, your own situation is unique, thus the amount that you would need for YOUR fund should conform to your situation.

 

As a general guide, save up according to the list below:

 

A three-month fund is recommended if you:

  • have a low rent
  • are in good health
  • are not badly in debt
  • have a reasonably stable job
  • maintain a low cost-of-living
  • don’t have kids or dependents, and this includes pets
  • can easily find another job if you lose your current one
  • have a reliable car that doesn’t require frequent repairs
  • have a partner or other family member to rely on for that occasional financial emergency

 

A six-month fund is recommended if you:

  • have a medical condition
  • maintain a high cost-of-living
  • have no one to rely on for occasional financial emergencies
  • will have trouble finding a job to replace your current one
  • enjoy high-risk activities (e.g. rock climbing, base jumping, etc.)
  • are a homeowner (remember to factor in the cost of repairs and maintenance)
  • have kids or other dependents that rely solely on you (yes, pets included!)
  • have an unstable job (e.g. seasonal work, working gigs, a struggling artist/musician, etc.)

 

A twelve-month fund is recommended if you:

  • are retired or nearing retirement
  • maintain a very high cost-of-living
  • have multiple kids and/or dependents who depend solely on you
  • have a niche/specialized job or work in dangerous locations or under hazardous conditions

 

 

Step #3: Decide how much to save each month

 

Next up, you should decide on how much you will be committing to save with every paycheck.

 

For starters, save a minimum of 20% from your income. To put it into perspective, this will take roughly 15 months to save enough for a 3-month emergency fund.

 

You also want to seriously consider skimping on unnecessary expenditure. In order to further hasten the process of saving up your fund, the only way is to increase the percentage that you save.

 

This will certainly be more challenging if your income is not fixed, so as a start, you will need to know exactly where all your hard-earned money goes.

 

Where’s your money going?

Where’s your money going?

 

This can be achieved once you have documented every single one of your expenses, no matter how small.

 

 

Options for Tracking Expenses

 

Option #1: Track Your Expenses Manually

 

One option is to use the old-tech method of writing down everything you spend money on.

 

This should cover your rent or mortgage payment and anything that is spent, including food, entertainment, and leisure. Moving forward, make sure you keep all your receipts for every purchase you make.

 

Sure, it’s going to be a little tedious but at the end of the month, you can see exactly what you’ve been spending your money on.

 

Option #2: Use Tools To Help You Track Expenses

 

Another option is to take advantage of technology. Nowadays, there are many mobile apps that can help you to keep track of your spending.

 

Here are 3 popular options:

 

1. Mint

 

Mint - Online Money Management

 

Mint is a free-to-use app that allows you to sync to your bank accounts and credit cards, create savings goals and track investments.

 

It supports customized alerts (over-budget, large transactions, ATM fees, etc.), reminders for bill payment, and even has security features such as Verisign scanning, multi-factor authentication and Touch ID mobile access.

 

2. Goodbudget

 

GoodBudget - Home Budget App

 

Goodbudget is free to use but has some limitations and one user account is supported on up to 2 devices. It also keeps a one-year transaction history and will help you keep track of your debts.

 

The app allows you to visualize your spending or to help you in prioritizing the goals you have set. However, it’s not automated, so you’ll have to manually key in the data for it to analyze your spending habits. In terms of security, it utilizes a 256-bit encryption in a secure data center.

 

3. You Need A Budget (YNAB)

 

YNAB - Personal Budgeting Software

 

With YNAB you get a 34-day free trial period and if you happen to be a student, the free trial period is 12 months. It also syncs with your bank accounts and credit cards, allows you to set specific goals and customize spending categories.

 

In addition, you will also have access to personal customer support. Par for the course are security features like encryption. Its data centers are also accredited and undergo third-party audits to ensure compliance.

 

For more budgeting tips, check out our guide on how to budget realistically.

 

 

Final Tip: Keep Your Emergency Fund Accessible

 

Remember, the whole point of having an emergency fund is to have it available at a critical time you may need it.

 

That means you need to be able to access it quickly and easily!

 

With that said, don’t keep your precious fund under your pillow or mattress and certainly don’t hide it in a jar. Keep your money somewhere safe, like in a simple savings account. This will help ensure that you can easily access your fund when the time comes.

 

That also means that you should avoid keeping it under a fixed deposit – since this can be a lot more tricky to access during emergencies.

 

Last but not least? Remember that Rome wasn’t built in a day! Stick to your plan and keep saving away because it’s going to take a bit of time before that emergency fund is ready.

 

Before you go – make sure to check out the rest of our tips on managing money.

 

 

 

Donald Wee

About The Author

From a life as a telecomms engineer, Donald has embraced his calling for writing. He's now an experienced writer in the fields of healthcare & parenting; often interviewing leaders in the medical profession.