We talk a lot on Personal Money about cutting costs and saving money, and one of the reasons we do this is so that you can start paying down your debt and making a better life for yourself.
But what happens when you do all the right things like cutting back on costs, reducing your bills and start saving, only to have some emergency derail all your efforts and you find yourself back at the beginning? That is when an emergency fund comes in handy.
What is an Emergency Fund?
An emergency fund is simply an amount of money you put away for emergencies. This would include things like out-of-the-blue car repairs, medical bills if you suddenly got sick or losing your job - basically anything that happens unexpectedly which you haven't budgeted for.
And buying new shoes or the latest gadget is NOT an emergency - no matter how badly you want it.
Why Do I Need One?
You need one because it provides a buffer between you and unplanned costs. It means that you won't have to rely on credit cards in an emergency and it means that you can sleep a little sounder at night, knowing you have a safety net.
How Much is Enough?
This is highly subjective, but I would aim at having at least $1,000. From there you can grow it to an amount that you feel comfortable with, but one-thousand dollars is a good amount to start with.
How to Start One
With all that money you are saving, all you really have to do is put a little aside each pay into an online savings account called yup, you guessed it, "Emergency Fund." It's best to set up an automatic transfer each pay for this so you don't forget to do it or get tempted to spend the money on other things.
You could also start a fund with a boost by selling some of your stuff on eBay or transfering some of your current savings into the fund to give it a kick start.
The key is not to touch this money, unless there is a legitimate emergency. If you have budgeted correctly and paid all your bills on time, then you should not have to touch the money in your account except for emergencies.
Having an emergency fund is one of the fundamentals of becoming financial independent and free. It will help you stay out of debt and keep you sleeping better at night.
Do you have an emergency fund? Let us know in the comments below.