“That will never happen to me! There’s no way I would need to plan for something as crazy as that!”
This was my mindset about a year ago when it came to creating margin in my savings to determine what I might need for an emergency fund. However, the past few months have been quite the surprise for me, and I am very thankful that I started an emergency fund for a couple unexpected events that came up in the past month.
This summer, I spent two weeks in India and during my second day there, my brand new phone was stolen. And it gets worse: a week ago, my entire backpack was stolen out of my car: my MacBook laptop, all of my books for my classes, my folders and notes, and some other valuables were gone, just like that.
“That will never happen to me! There’s no way I would need to plan for something as crazy as that!” This doesn’t sound so crazy now, does it? What do you do when you need to expect the unexpected?
This is where the emergency fund is the perfect answer.
1. What is an Emergency Fund?
An emergency fund is defined as a financial safety net for future mishaps and/or unexpected expenses. When you get in a car crash, break your arm, or (like me) lose some pretty valuable electronics, an emergency fund provides you a safety net when things go awry.
2. How much money should I put into an Emergency Fund?
Generally speaking, an emergency fund should typically have three to six months’ worth of expenses according to most financial planners; however, this is not a hard and fast rule. If you are low-risk and would prefer to have more money set back for an emergency just in case, go for it–you could save a year’s worth of expenses instead. If you are high-risk and don’t feel the need to set apart a significant amount into an emergency fund, try keeping a month’s worth of expenses instead. Everyone has different financial goals and leanings, so there is no hard and fast amount; however, it is crucial that you do decide sooner rather than later to save for an emergency fund.
3. What is considered an “emergency”?
This is a critical question to ask yourself before something unexpected comes up. If your car just broke down and you need a new one, you may consider dipping into your emergency fund to cover a new car or repair the old one. If your friends want to go out to eat and you’re short on cash, it’s up to you, but this might not be the most pressing emergency out there. Here are a couple ideas to consider as emergencies to get you started: car problems, medical emergency, job loss, heat going out in the winter, stolen phone/computer, etc.
As I write from a computer I borrowed from a friend while I wait to get my new one, I assure you that making space in your budget for what you might not expect is a financially wise decision. I’m sure I’m not alone in having something surprising come up, but to everyone who says, “That will never happen to me! There’s no way I would need to plan for something as crazy as that!” You just might want to think twice about creating an emergency fund.