Emergency Funds – The What, Why, and How

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An emergency fund or rainy day fund is money you set aside to prepare for unforeseen expenses or emergencies. You can use it to pay for unexpected expenses, such as car repairs, home repairs, replacing your furnace, or replacing your income in case of job loss or unemployment.

An emergency fund would not be something you would use to fund your wishlist, like vacations and other discretionary expenses.

As per a Bankrate survey, over 25% of Americans do not have any emergency savings at all. Out of the 75% who have an emergency fund, most do not have enough savings to last three months.

Why Is an Emergency Fund Important?

Emergency funds can help you in unexpected financial emergencies. Without it, you may have to borrow money or use your credit cards to pay for unforeseen expenses, leading to debt and financial problems. Prepare yourself, so you do not find yourself in a similar situation.

Most experts recommend having at least three to six months' worth of living expenses saved in an emergency fund.

How Much Money Is Required in an Emergency Fund?

While the 3 to 6-month recommendation is a good rule of thumb, consider it a minimum baseline and do your assessment to determine how much money you may need in an emergency. You may want to save more money if you have a higher risk of emergency expenses.

The more dependents you have, the more money you would need in the case of an emergency. You can set a goal of a fixed amount per member of your household or simply choose to save a percentage of your salary.

Your savings goal will need to be different if you have college tuition to pay for versus if you have a newborn child. A similar consideration is if you have elderly parents with medical expenses.

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