Do You Have An Emergency Fund?
Saving An Emergency Fund
Once you start earning a decent wage there is a natural inclination to spend more just because you are making more.
With money the world suddenly seems to open up to you, and there is a seemingly endless supply of goods which are available and which you can afford.
But just because you now have money to spend it doesn’t mean you should stop worrying about money, or how you should use that money.
Sure, life is for living and you should enjoy yourself, but when it comes to your finances you always have to keep your eye on the ball.
So in this article we are going to be looking at some of the common expenses people have once they start to earn a decent wage, however to begin with, lets quickly look at one very important area; emergency funds.
Saving For A Rainy Day
Regardless of how much you earn, everyone should have some money saved away. There are two reasons for this :
1 – Your Future
The first is for your future, so that when you retire you have something to support yourself with.
The worst thing you can do is not to save anything, and then be dependant on the government for the rest of your life.
Why? Because there is a very good chance that in the future the government won’t be able to support you, or it if will, it won’t be to a very high standard.
I have written more about the importance of saving for your future in the following articles :
“What Is Your Money Personality?”
2 – Emergencies
The second reason you should save some money is to provide you with cover should circumstances in your life suddenly change, such as you becoming ill and not being able to work or loosing your job due to your company downsizing.
These funds are known as your emergency funds and will provide you with some breathing room should you loose your main source of income.Â
For this reason they should only be used in emergencies, and not dipped into when you are short of cash.
Who Benefits From Having Emergency Funds?
Whilst everyone would benefit from the added security an emergency fund provides, some may need it more than others.
For example, if your income is dependant on your ability to sell products and if you don’t sell you don’t get paid, then you would gain great benefit from having an emergency fund because your income is in an unstable one.
If you go through a rough patch where your income is very low, then at least you will have some money tucked away in reserve which will allow you to maintain your standard of living while you get yourself back on your feet.
For those who have a more secure job with a regular pay check such as working for the government or any other growth industry, then you could probably get away with putting aside less money in your emergency fund.
However it is extremely important to realise that regardless of how stable your job is, you still need an emergency fund.
Nothing in life is 100% guaranteed, and you cannot predict what will happen to you in the future. So it is always best to prepare for the worst should it happen.
In addition to this you should also consider planning for major life changes.
For example, if you get married and have children, then for a period of time there may only be one person supporting that family.
Having an emergency fund can help to ensure that you, your spouse and your child live a comfortable and financially secure lifestyle.
Saving Yourself From Debt
Even if you don’t ever have a need to use the money you have saved up in your emergency fund, that money is not wasted because it can be added to your savings for the future. As a result, you will have even more money when you retire.
But let’s think about what would happen if you didn’t have an emergency fund, and your income was suddenly cut off. What would you do then?
The natural reaction for most people would be to get a loan or use their credit card as an emergency fund, until they were able to get themselves back on their feet.
This will probably work for a awhile, maybe 3-6 months, but what happens next? For most people the answer will be debt.
Eventually the money taken out on credit will have to be repaid, and unless you are able to find a job that can repay those debts they will continue to grow and grow.
Hopefully you will be able to get yourself another job, but if you can’t, you could find yourself in a very serious financial situation.
Of course the easy way to avoid this happening to you is to save some money away for a rainy day, so that if something unexpected does happen to you in the future you are at least prepared for it.
Having an emergency fund is no guarantee that you will always be financially secure should disaster strike, but it will put you in a much better position than most and give you the best possible chance of recovery.
How Much Money Should Be In Your Emergency Fund?
As a general rule you should keep at least 3-6 months worth of income saved up in your emergency fund.
How much you save should give you adequate time to find another job, whilst also maintaining your current standard of living.
If you are willing to make some sacrifices, then this emergency fund could probably be stretched to cover double the amount of time it was originally designed for.
But this really depends on what sort of lifestyle you live now, and what sort of lifestyle you designed your emergency fund to allow you to maintain.
Should I Repay My Debt First Or Save An Emergency Fund?
If you are trying to decide between repaying a debt and saving an emergency fund, it is generally recommended that you repay your debt first as this is a reoccurring expense which will continue to grow due to interest.
However if you feel that there is a risk you could be made redundant in the near future, you may have to divide your income between your debt and your emergency fund to cover yourself should you loose your job.
If this applies to you, it would be wise to budget your income and examine what expenses can be reduced or eliminated.
For more information on how to create a budget, see the following articles :
“Creating A Personal Budget”
Remember that whatever you do your ultimate goal should be to create a financially sustainable lifestyle.
You do this by repaying all your debts, minimising your expenses and saving a portion of your income for your future.
