Everyone experiences a rainy day—a time in your life when you may experience a layoff or some other unexpected event when you have to dole out money. And that’s why you’ll want to have “rainy day” savings—a pair of financial rain boots that can keep you high and dry when things get wet.
Rainy day savings, or an emergency fund as its often called, can be your best friend. Whether you need to come up with some money to pay for an emergency tooth filling, or just need a little extra to cover your bills for the month, an emergency fund can be a lifesaver.
What’s an emergency fund?
An emergency fund, or rainy day fund, can be your financial backstop and cushion. It’s a stash of cash that you have saved up in the event that you need a few—or few hundred—bucks in a pinch.
A typical emergency fund has two key characteristics:
- It contains between three and six months of expenses.
- It’s liquid, meaning that it’s easily accessible (in a savings account, for example).
Again, the idea is that you have some easily-accessible cash that you can tap into when needed. It’s not a vacation fund, or money that you can use to buy a car. It’s there in the event of a financial emergency.
Why an emergency fund is important
Life can throw you curveballs with little or no warning. And that’s why it’s so important to be financially prepared. An emergency fund can be a lifeline when any number of things goes wrong. Here’s a few reasons why saving up for an emergency fund should be a top priority:
1. You’re covered if you lose your job
Unexpected job losses can take anyone by surprise, whether it be due to cutbacks, bankruptcy, or job performance. Even people in a seemingly secure or tenured position can lose their jobs under certain circumstances.
It could take days, weeks, or months to find new employment. An emergency fund will allow you to stay financially stable for a few months as you search and interview. Without this fund, you might be tempted to take out your credit cards and rack up high-interest debt as you struggle to pay your monthly bills without a steady paycheck.
2. Forgotten or unexpected bills won’t derail you
Even the best budgeters and planners may sometimes forget about large expenses, such as yearly membership renewals, professional dues, or a tax bill. Without an emergency fund, you may be left scrambling to pay on time—plus interest.
You’ll also always be covered for unexpected expenses, like pricey car or home maintenance costs, medical needs, or extra child care expenses. Saving for emergencies means you’re always covered when you forget about a bill.
3. You may never pay credit card interest
Being able to handle forgotten and unexpected bills also means you won’t pay credit card interest. An emergency fund is a much wiser alternative to a high-interest payday loan, credit card or credit line. This interest will add up over time, making your tough financial time even tougher to dig out of.
Paying interest is, for most people, a necessary evil for things like mortgages and student loans. However, paying interest on normal expenditures should be avoided at all costs. Having an emergency fund could save you hundreds or even thousands in unnecessary interest charges.
4. You’ll never be “that friend”
We know people who just can’t seem to get ahead of their finances—when life throws a financial curveball, they can’t cover themselves and end up having to hit up their friends for cash.
Here’s the thing: Borrowing from friends and family members puts both parties in an awkward situation, and puts the entire relationship at risk. By saving emergency money, you won’t have to be the one begging for help until next payday.
5. You’ll sleep easier
Life is just generally much more stressful when you know you’re one emergency away from financial ruin. By saving up an emergency fund, you’ll sleep more easily knowing that you can handle the unexpected costs life will inevitably throw at you.
Tips for saving
Setting aside six-months’ worth of expenses can seem like a huge undertaking, but with a disciplined approach, it’s entirely doable. Here are some tips:
Set a goal. Figure out how much you’ll need, and calculate how much you can save each month.
Budget, budget, budget. If you don’t have a budget, build one—it’s the most important step toward getting your finances in order, and for saving. Build a budget, or reconfigure the budget you currently have to work with your savings goal.
Stash the extras. Received a tax refund? Put it in your emergency fund. Get a raise at work? Keep your spending the same, and stash the difference in your emergency fund. The point is to take any extra money and deposit it into savings until you reach your goal.