At the moment, you don’t have anything in your emergency fund. You have more loose change sitting in your jacket pockets than you have sitting in that savings account.
You know that an empty emergency fund is a useless emergency fund. If you got hit with an emergency expense right now, you know that you’d have no savings to cover it. You’d have to do something like try to get a loan online to solve the problem. If you met the qualifications for the loan, you could fill out and submit your application. And if that application got approved, you could use borrowed funds to handle the emergency expense. Then, you could follow the online loan’s repayment plan through a basic billing cycle.
Having an emergency fund full of savings would make this situation much easier.
You want to start making contributions to the savings account and build up a balance, but you don’t know what your ultimate savings goal should be. How much should you save up? How big should your emergency fund be? The answer to those questions all depends on what you intend to do with it.
Handle Urgent Expenses:
A basic emergency fund is meant to help you handle small urgent expenses right after they arise. Think of the following situations:
- Calling a plumber to thaw frozen pipes
- Buying a spare tire when your car gets a flat tire
- Hiring a repairperson to patch a leak in your roof
- Rushing your pet to the vet clinic when they suddenly get sick
- Going to the dentist when you have a terrible toothache
- Repairing your smartphone that got water damage
How much should you save?
You don’t need to save up a fortune for these types of expenses. Ideally, you should strive to have at least $2000 in your savings account. This should be enough to cover most urgent repairs without breaking a sweat.
Weather Times of Hardship:
An emergency fund can act as a financial safety net in times of hardship, particularly when you don’t have your usual income to rely on. Think of the following situations:
- You unexpectedly get laid off from your job
- Your hours at your job are drastically cut
- Your spouse or roommate loses their job
- You fall seriously ill and can’t work
- Your relative falls ill and you need to care for them
- A loved one passes away and you need time off to grieve
With a substantial amount of savings, you can supplement your lost income. You could use those savings to cover essential expenses like your housing payments, utility bills and groceries without any stress. Doing this will give you time to recover from your hardship. For instance, if you lose your job unexpectedly, you will have time to hunt for job opportunities and do interviews until you find an acceptable replacement.
The general rule of thumb is to save 3 to 6 months’ worth of expenses in your emergency fund if you want to use it for this purpose. Some financial experts recommend that you aspire to save even more — you could save 9 to 12 months’ worth of expenses in the fund. That way, you could stay financially stable through long periods of hardship.
Don’t get intimidated by these bigger savings goals. Start small. Focus on making a single contribution to your savings account and move forward from there. You’ll fill up the account soon enough!