All you need to know about emergency funds

Do you need an emergency fund?

08:58 24 December 2013

In life, you have to expect the unexpected. And you need an emergency fund for the same reason.

How useful are emergency funds?

Emergency funds are funds set aside during your regular budgeting to be used only to pay for the unexpected. These funds that you have set aside while everything was going well can help you when the unexpected happens. Having this money available at that time will certainly help you deal with the stress of the unexpected. For instance, they can be used when you receive an unexpected bill such as repair for your vehicle or an emergency hospital visit. They can also be used when you lose your source of income by losing your job or having an illness.

Creating one

The way to create an emergency fund is to set aside a given amount out of each budget cycle and put it in an easily accessible account such as a savings account that is separate from your regular money and only access it in case of an emergency. You will need to discuss with those involved just what will be considered an “emergency.”

It may take a while for this fund to build up to the proper amount. Remember as you set the funds aside each month that it is better to be frugal now and have it when you really need it than to spend it on non-essentials now.

How much do I need?

The general advice about how much to have in your fund is that you should have enough to cover three to six months of your regular expenses. However, if your income source is one that would be difficult to replace you should have more.

The amount you need in your emergency fund depends on factors such as your circumstances, your regular budget, the sort of emergencies you might face and the other sources of funds you might have available if an emergency happened. Many people have insurance in place to cover certain losses or expenses. This would affect the amount you would need in your fund as you would only need enough to tide you over until the insurance payments kicked in.