If you've never heard of Murphy's law, it merely states that anything that can go wrong will go wrong. You know, you've had to spend extra on groceries, pay for your child's field trip, and out of nowhere, your car breaks down.
The feeling of overwhelming stress and “why me!?” overtakes your thought process. What if I told you that there’s a way to help alleviate that feeling when unexpected issues present themselves? It’s called an emergency fund.
What is an Emergency Fund?
An emergency fund varies in the eyes of people you ask, but it should be enough to cover at the very least, one-month worth of expenses. In terms of dollars, this will typically be around $1,500 to $2,000.
This fund is designed for emergencies only, such as sudden car repairs, an unexpected illness, or sudden layoff from your job. What you should not use this fund for is your pizza orders, forgot to buy lunch or something that is not a real emergency.
Why you need an emergency fund?
The purpose of an emergency fund is to make an already stressful situation a bit more manageable. Most people live from paycheck to paycheck. Then when a water heater goes out, they don't have the $1,000 to fix it.
Instead of taking out a loan or running around asking people for money, you can rest easy knowing you have a pool of money set aside, dedicated explicitly for this purpose. Let's take this a step further.
If you are working on getting out of debt and your roof needs fixing from a storm, without an emergency fund, you'll likely have to use a credit card or take on more debt. Instead of taking steps back, an emergency fund allows you to remain where you're at and not lose ground on your mission.
Where to Store your Emergency Fund?
The best place to store an emergency fund is in a savings account that is not attached to a debit card. While you still want to have easy access to your funds, you don't want it to be so easy that you pull out your phone, make a transfer, and you're ok to spend again.
An emergency fund should be an out of sight, out of mind account. This account is only when absolutely needed and replenished as quickly as possible.
Part of financial well being is to have a solid economic base in place. A rainy day will come, and by having that emergency fund in place, you'll face that rainy day head-on and keep progressing to your financial goals.