We’ve all felt that dreaded feeling before—when the car unexpectedly dies or we discover that there is a leak in the house that needs to be fixed immediately. Any expense that you aren’t prepared for is always a challenge. It’s money you didn’t intend to spend and perhaps don’t even have to spend!
This is why it's important to have money saved for those surprise expenses in an emergency fund. In fact, most experts suggest having about three to six months' worth of expenses saved. But how many of us actually have that money put away? Maybe this is the year you want to save for the unexpected so that when something unforeseen happens, you’ll be ready!
Saving for the unexpected is essential because you’ll be ready for all the things life throws at you. It ultimately means you won't have to worry about how you'll pay the bills and put food on the table while paying for a costly, unanticipated expense. With your emergency fund, you can make your life a little less stressful when unannounced changes occur.
If you have an emergency fund, you likely won’t have to go into debt when trouble hits. Instead, you can use the money that you have saved up specifically for that reason. An emergency fund means that you’ll be able to continue on as normal if something unexpected comes up, and you won’t have to worry about money. That’s good news, as change is always hard without having to deal with money problems as well.
Emergency funds are particularly important if you’re a one-income household or if you are self-employed. Having a little bit of financial margin can help you in the case of an unexpected job change or if you have a slow month.
Plus, if you’re saving for a goal with a separate account, it might be tempting to use that saved money for an emergency if you don’t have an emergency fund in place.
If you’ve seen the movie Up, that’s exactly what Carl and Ellie Fredricksen do. They have a coin bank to save up to visit Paradise Falls in South America, but every time something goes wrong, they dip into the account. As a result, they find themselves at the end of their lives, having never saved up enough money to visit Paradise Falls.
You don’t want to find yourself in the position of Carl and Ellie Fredricksen—using the money you’re saving for something fun toward an emergency instead. Rather, if you have an emergency fund, you’ll be able to take care of the expense and still work toward meeting your savings goal.
There are so many different ways to save for an emergency fund, but a great way is to write the contribution into your monthly budget as if it were another bill or expense. That means that if you want three months' worth of expenses saved, you can reach that in one year by saving one-fourth of your monthly expense amount per month.
For example, if you spend about $2,000 per month on bills and other major expenses, you’ll need to put away $6,000 to have three months' worth of expenses saved. Thus, you should save $500 (or one-fourth of your monthly expense amount) per month to reach your goal of $6,000 in a year.
Realistically, though, it might take longer than a year. If you can only afford to save $125 per month instead of $500, then that's okay! You just need to figure out what monthly contribution amount is going to be best for you and include that in your monthly budget. Don't forget to divide your goal amount by your monthly contribution and adjust your timeline. In this case, you'd now reach your emergency fund goal in 48 months (6,000÷125) instead of 12 months.
The great part is that when you finally reach your savings goal of three to six months of expenses saved, you’ll be in the groove of saving that money. That means that you can put that monthly contribution to another savings goal like a trip to Spain or a cruise to the Bahamas.
By being diligent about setting aside money in an emergency fund, you’re setting yourself up for financial success. When the unexpected comes, your life can continue on as usual because you will be prepared.
Emergency savings funds can seem a little unnecessary when you could be putting that money toward paying down debt or a down payment on a house. However, when you find yourself in a financial bind because of an unforeseen expense, you’ll realize just how valuable that emergency savings fund is. By making it a part of your monthly budget, you’re acknowledging how important it is to have money saved for the unpredictable.