Emergency funds are essential to any financial plan, yet often overlooked. If you find yourself living paycheck to paycheck without a way to cover unexpected expenses, it's time to re-think your money situation and prioritize building up that emergency fund! While saving for the future may not seem as exciting compared to other goals like buying a house or taking a vacation, having an emergency fund will bring you peace of mind by providing a safety net if something goes wrong. This blog post will explore why setting up an emergency fund is essential and how best to do it!

What is an emergency fund and why do you need one

An emergency fund is your lifeline in the face of crises. It is a stash of money set aside to weather unexpected financial storms. Cushioning the blow of an untimely car repair or medical expense means you don't have to rush into making a rash decision when it's challenging to think clearly, like using a credit card or taking out a loan. Setting up an emergency fund allows you to gain peace of mind knowing that whatever life throws your way, you'll be prepared and able to manage the situation in the spirit of grace and confidence. Plus, you won’t have to resort to getting into credit card debt or asking family members or friends for money during challenging times. I remember in 2009, during the recession, and in 2012 when I was out of work, I had to ask friends and family for money; that’s not something I wanted to repeat, so I made sure I built a well-funded emergency fund. I have not asked for help from anyone. The bottom line is that an emergency fund just makes sense for everybody – as nothing is as specific as life's inevitable curveballs.

How to calculate how much money you should have in your emergency fund

Step 1

Figuring out how much to keep in your emergency fund can take time and effort. However, you should consider a few key elements that will help you make the best financial decision for yourself. First, assess how comfortable you feel with the idea of unexpected expenses. For example, do you feel confident saving three months' worth of expenses to cover either job loss or an unexpected medical bill? Or do you feel more secure after setting aside six months' worth of funds? Secondly, consider whether your savings will help pay for any foreseeable large purchases in the next couple of years

Step 2

List all current expenses such as rent or mortgage, groceries, utilities, and other monthly bills. After that, add in any debt obligations such as student loans or car payments and subtract that from your take-home pay. The amount left over will give you an idea of what kind of emergency fund goal makes sense for your situation. With that plan in mind, allocate some of each paycheck towards your emergency fund until it reaches the desired total. An emergency fund can be highly beneficial if financial issues crop up throughout the year—so start planning now.

Step 3

f your job isn’t paying enough to contribute to your emergency fund, lower your expenses, take on a second job, or do overtime at your current employer. Once your emergency fund is complete, you can relax and take your foot off the pedals.

Why it's important to have a rainy-day fund in addition to an emergency fund

If you find yourself in this situation, the best thing to do is take a deep breath and remind you that you can get through it. Therefore, you should have an emergency fund for your emergency fund. Yes, you heard me correctly. You should have a SMALLER emergency fund called a rainy-day fund.

A rainy-day fund is overlooked compared to an emergency fund, but it's essential to have both. A rainy-day fund is money you keep saved when you want to make a SMALL unexpected purchase or need a bit extra to cover small bills. If a small, unexpected expense arises, for example, your laptop broke or a small medical cost, your rainy-day fund comes in handy. So think of your rainy-day fund for short-term or small unexpected expenses and your emergency fund for a MAJOR emergency that will require more money, like losing your job.

The rainy-day fund ensures you NEVER have to go into your emergency fund. Saving up money in both funds allows you more control over your finances instead of relying on credit card debt as a short-term fix. Having both funds ensures that if something unpredictable happens, you have the right resources to manage it effectively. Remember, when you take money out of your rainy-day fund, you should also replenish it.

Emergency Fund savings strategies

Prepare for the future and anticipate potential expenses. To achieve this, create multiple savings accounts at a bank with no fees to manage costs such as vehicle maintenance and home repairs, braces, or veterinary bills that may arise in the coming years. For higher return rates opt for a high-yield savings account or money market account which will also give you easy access to your cash when needed - even offering check writing abilities! Commit yourself to saving regularly each month without fail so it forms part of your routine life habits; automate payments where possible too. My recommendation is the Capital One 360 savings account because they have physical branches. But if you don’t need a physical bank you could also use discover and American Express they both have great no fee high yield saving accounts.

The benefits of having a well-funded emergency fund

Having a well-funded emergency fund is like having an ace up your sleeve in case of financial emergencies. Not only does it help protect you from potential financial disasters, but it can also provide you with some peace of mind so that you can focus on the critical things in life. An emergency fund can also serve as a buffer against unexpected costly expenses, like medical bills or car repair fees, that could put you into debt if not accounted for. It's wise to treat your emergency fund like a long-term investment and continually contribute to it over time because it will come in handy when money gets tight and you need a lifeline. But keep in mind that at some point, it's good to start investing.

The importance of an emergency fund and a rainy day fund.