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How much do you need for an emergency fund?

Is there a specific amount you must have in your emergency fund for unexpected times? The answer is “yes.” Without a minimum amount, you can never have the sense of security of having an emergency fund.

How much should you put in your emergency fund? How much money is enough money for bad times? Does the government provide any special amount in certain countries?

It is important to note that using secured credit cards in Canada, Germany, the US, or the UK can help you put some funds aside every month. Also, using it for purchases that can push you to create a good credit history or score will only help you build a good emergency fund in the long run.

Read the complete guide to find everything you need to know about a good emergency fund!

Emergency Fund – What Is It?

As the name suggests, it’s a fund specific to your “emergencies.” Of course, nobody ever wants to be in a situation where you can’t find the money you need to survive and cope with what life throws at you. Unfortunately, however, life is not a bed of roses.

Instead, it puts all sorts of challenges and difficulties in your way to train you to live better. So, to deal with such unexpected situations, you must have an emergency fund.

In simple words, the money you set aside from your necessary daily purchases and will never use until or unless you run out of all your money can be considered your emergency fund. However, it doesn’t imply you should put that money in your side drawer, under the mattress, or crumpled in your clothes.

  • You must officially set up an emergency fund as a savings account or your regular (not-for-daily-use) account.
  • You can also open the account with your current credit card service provider.

An emergency fund can provide you a sense of security through troubling times by preventing you from racking up debt to cover unforeseen expenses. It’s not intended to be a getaway fund; rather, it serves as your personal insurance if you get laid off or have to pay a significant, unplanned bill.

Why Do You Need An Emergency Fund?

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According to a report by the financial post, only almost a quarter of Canadians have set up an emergency fund for bad times. Whereas 40% of Canadians only have funds to survive for a month. The figures alone prove why there’s a need to build an emergency fund.

Moreover, a sudden outbreak or accident can happen, which can always put you into trouble if you don’t have additional finances. The unanticipated situation can be:

  • Car breakdown
  • Job loss
  • Natural disaster
  • Health issue

Of course, most people tend to put the bills on their credit cards to deal with them later. However, if you are already struggling with finances, the credit card debt will only corner you further. Here read some reasons why an emergency fund is important:

1.    A Key To Avoid Debt

As we explained earlier, it is better to use your personal finances than to borrow money from a friend or a bank that can put you in financial debt. But, of course, if you want to use the funds to expand your business, a bank loan can be your way to go.

However, the only solution is building an emergency fund if you want to live conveniently for at least six to seven months without worrying about going homeless due to all the debt.

See: How To Get A Credit Card With No Income

2.    Your Personal Insurance

Suppose you lost your job, but you still need to pay your everyday bill, and you still need to make your necessary purchases.

Or you become ill and can’t continue your work for 3 to 4 months. In that time, instead of putting everything on your card, you can utilize your emergency fund as your personal finance. Then, of course, you might get some help from your health insurance, but you must still pay the rest of the bills.

3.    Your Peace Of Mind

If nothing, having an emergency fund can give you peace of mind that you have at least some type of backup plan if things go south for you. It can give you a sense of security and relief that you are not entirely broke if an unplanned situation comes your way.

How Much Do You Need For An Emergency Fund?

How much money is enough money to have in your emergency fund? The answer to this question actually varies depending on the individual’s current situation. The “enough emergency fund” depends on your lifestyle and how you manage money.

The experts suggest having at least three to six months of expenses saved in your emergency account as the bad-times-fund. Of course, the result of your emergency fund calculator varies on how you live and how you want to live. It also considers how long you want your funds to last.

  • A general rule of thumb is to reduce the amount of your safety net if you have to pay down your car loan, mortgage, or college advances.
  • However, you can adjust the amount you put into the funds every month as per your finances.

But remember to save enough that can help you last six months without a job. You might also want to budget for funds to ensure you are saving enough money you need for an emergency fund.

When To Start An Emergency Fund?

Have you heard of the phrase: it’s better to start early than to finish late?

Well, the saying fits the question perfectly “what is a good time to start saving for your safety net?”. Because the early you start, the more you can save for your tough times. In fact, the early start can help you save efficiently as you won’t have to cut down on your favorite things to set aside some money.

However, if you’re already in your 30s, don’t worry. The best time to start an emergency fund is “NOW!”

The moment you’re reading this guide, you should have a clear answer that right after this, you should call your card service provider and ask for a savings or emergency account! You can also talk with your financial advisor to have an opinion on different options you can get for the account.

When compared to all the expenses and growing inflation, a household’s average annual income of $30k to $40k is not much. So, when you advise such a family to set up an emergency fund, they might look you in the eye, thinking you’re joking.

Because no way that’s possible with their current lifestyle and income. So, how can you start building your safety net? Let’s find out in the next section.

How To Build An Emergency Fund?

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Your general financial security depends on having some emergency funds on hand. It’s typically advised to have enough money to support your bills for three to six or more months. However, for many people, that sum can be frightening, which deters even the most well-intentioned saver.

But hey! Don’t give up before you even begin though!

Savings is primarily a power game that you can win if you think through everything smartly. Even if you’re starting from scratch, consistently setting aside money, even in modest quantities, will help you reach your objective of building an emergency fund. It only requires some patience and time. Let’s read some tips that can help you create one:

1.    Practice Saving Habits

If you don’t have a habit of smart saving, you can never set aside enough money every month to put into your savings account. So, even before you set up your account, you can practice leaving some emergency money in your wallet or a piggy bank. The key is to have an idea how well you can manage with a limited income and financial budget.

  • You can create a savings goal to see if you can meet it monthly or not.
  • You can budget to ensure you fulfill your financial goals.

The reason for practicing the saving habit is to figure out how much amount you can save without feeling the emergency money pressure.

2.    Have A Proper Funding Account

The location of the emergency funds is its main feature. If you put your spare cash in a piggy bank at home, for instance, you could be tempted to crack it open and use it if your monthly spending falls short. Similarly, if you keep it together with your everyday use card, the same is likely to happen.

So it’s important to set up a separate emergency or savings fund for all your ‘trouble times money.’

  • Choose your emergency account wisely as it will be helpful for your bad times so look around and do your research before finalizing the type of account and service provider.
  • Look for an account that comes with zero transaction charges and no penalty fees

You want to earn some interest on all the money you are saving into your account so it’s essential to pick the best and most benefitting one.

3.    Be Realistic

We’ve been going on and on about the importance of emergency funds and the account for a hot minute now. So it’s only fair to mention the absolute necessary thing about saving money.

You have to be realistic about your finances!

Yes, you have to pick an amount that’s realistic and can be set aside successfully every month. For example, if you manage to save $5000 one month due to bonuses or thanks to your passive income. But, the next month you could only set aside hardly $500, the money difference will only put you into a foul mood.

In fact, it might discourage you to a point that you skip the entire idea of having an emergency fund.

Bonus: Use a budget planner tool guide to identify how much you can save.

4.    Automate Your Money

If you are new to the world of emergency saving and funds, or if you find it hard to stay on the track of saving money. You might want to consider automating your money. It is the best option for those who struggle to stay on the road to emergency funds.

  • You should automate the money right on the day of your paycheque or you might get too lazy to do it later in the month.
  • You can ask your card provider to enable the service or do it yourself from the settings in the app.

The benefit of automating the funds is that it can help you save an adequate amount of money every month. Also, you don’t have to think hard on how much you can save as the funds are already decided and transferred to your account.

When To Use An Emergency Fund?

Emergency fund is created for the sole reason of saving you in bad times. For example, any situation that you didn’t plan for or require extra money from your budget is considered an emergency.

So, you should utilize the money from your emergency fund only in those unexpected times.

  • Needing money to buy a PS5, branded bag, a smartphone can’t be considered an emergency
  • But needing money for that unexpected birthday party, car repair, hospital bill, or insurance money can be categorized as an emergency situation which you didn’t plan for.

So, categorize the situation well and think carefully before you withdraw money from your emergency fund.

Final Thoughts

Emergency funds are the key to ensure financial security in your troubled times. The savings money makes sure you don’t starve to death even if you lose a job or the world hits a pandemic.

It might sound daunting but it’s really not that hard!

If you set aside at least some of your income monthly, you can surely save 3 to 6 month worth of expenses. Want to know how? Read the tips mentioned in the guide!

 

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