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Are you putting money into an emergency fund? If not, you need to right now. It’s one of the most important parts of budgeting.
When I started my journey to being debt-free, I didn’t initially start building an emergency fund. Then something would happen and I’d be back in tons of debt. I realized that I needed to save for the inevitable.
My emergency fund has since become one of the most important parts of personal finance.
In fact, I have multiple types of savings accounts for the future. I have an emergency fund that I’m building to have three months’ worth of income in it. Then I have a sinking funds account that covers emergencies, such as when my car needed a new ball joint last year.
So, you need to start an emergency fund, and here’s why.
What is an emergency fund?
This is a savings account where you have money in the event of an emergency. This isn’t one of those “oh I’ve found the perfect shoes in a sale and must have them” type of emergency. It’s there for when you lose your job and you need time to cover your rent and bills until you get a new job.
Your sinking fund is then there for if your car or boiler breaks down. However, if you don’t have the sinking fund yet, at least have the emergency fund to fall back on. This fund is to make sure you don’t need to get in debt to live.
Putting a little aside each month
It’s really important to put a little bit of money aside each month for your emergency fund. I put in $200 per month into my emergency account and $100 per month into my sinking funds account when possible. That’s not always possible. My income fluctuates, so sometimes I can only put $50 into the accounts.
It’s going to depend on your life and your needs. If you have a lot of debt still, you’ll want to clear that off but you still need to build your emergency fund. So, let’s say you were going to put $100 toward your debt (on top of minimum payments). Put $70 to the debt and $30 to the fund instead.
The aim is to put in enough to build up over the course of the year, while not putting yourself into difficult financial situations where you have to choose between feeding your family or heating your home. If that means just putting a couple of dollars a month away each month, then aim for that. It’s better than nothing at all. Building up savings can also help safeguard your family’s financial future and protect company assets in times of need.
No longer leaning on the credit cards
The benefit of this is that you don’t need to lean on your credit cards as much anymore. I use my credit cards purely for cash flow and to build my credit. I know how much I’m going to get paid at the end of the month right at the beginning. So, I can set my budget and only spend the money I will have available at the end of the month to clear the credit cards off.
The last time I had to use the credit cards for an emergency was when I first moved to Canada, seven years ago. My car needed new brakes that I hadn’t budgeted for.
Since then, the emergency fund has always covered the amount we needed. When I needed to get the ball joint repaired, I had the money available for it and the savings account wasn’t even wiped out! You can do it too. I’m doing it on a single income—and before anyone grumbles about “wives taking all the money in the divorce,” I don’t get child support or alimony.
MORE: Why your emergency fund needs to be in a savings account
It’s time to start saving for your emergency fund. It really will help you. We’ve found it invaluable.
Get in touch to set up your budget and see how you can start your emergency fund.
