Emergency Funds – The What, Why, and How

These are bleak scenarios that no one wants to imagine happening to themselves, but will you be financially prepared if it ever did? If not, then now is the time to start building your emergency fund.

An emergency fund or rainy day fund is money you set aside to prepare for unforeseen expenses or emergencies.

What Is an Emergency Fund?

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.

Emergency funds are an essential part of any financial plan. They provide a cushion in case of unexpected expenses or emergencies.

Why Is an Emergency Fund Important?

Take the Covid-19 pandemic as an example. It may be slowing down, but thousands of people lost their jobs or were hit with unexpected medical bills. Not all of them were prepared.

The latest Bankrate survey finds that more than 20% of Americans do not have any emergency savings at all. And out of the other 80% who do have an emergency fund, nearly one in three (30 percent) do not have enough to cover three months of expenses.

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.

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