Savings: Emergency Funds
Welcome to Part 2 of my mini-series on savings. Let’s talk about emergency funds. An emergency fund is basically what it sounds like: an amount of money you’ve set aside to cushion the blow on a rainy day. It’s an investment in peace of mind, as compared to an investment in financial growth.
What’s a good emergency fund? To start with, $500-1000 will probably see you through until you get any debt you have under control. Once you’re financially stable, you should build up enough money to cover 3-6 months of expenses. That means you’ll need to know what you spend during the average month. It also means that if you lose your job, for example, you’ll be okay for a few months rather than being plunged into an immediate and severe financial crisis.
An emergency fund can cover you against all sorts of things: lost jobs, medical emergencies, wrecked cars, etc. But there are some things an emergency fund is not supposed to cover. It’s not for a new leather couch or a china cabinet. It’s certainly not for that ski vacation or a trip to the beach. It’s not for shopping sprees. It’s there for emergencies only, and if you don’t respect that it may not be there when you need it.
Resist the urge to invest the money. It’ll be a decent chunk of change, but remember that with investment return comes investment risk. An emergency fund is a safety net, and what’s the use of a risky safety net?
Thanks for reading,