We can't know what will happen in the future or what obstacles will stand in our way. This makes it important to save money for emergencies. Building up an emergency fund is good for your financial health because you rarely know ahead of time when a setback or accident will happen that will keep you from working for a long time. It's also a safety net that can keep you from going bankrupt or having a hard time with money if your income or expenses change in a way you didn't expect.
A small fund for a rainy day should be a key part of a person's financial goals. This is very important if you don't already have money in your account that you can use to pay for unexpected costs. They give you financial security because they give you money to fall back on if you get sick, lose your job or your spouse's job, have big medical bills, or have a big bill that you didn't expect, like a major car or home repair. You don't want to end up in a situation where you have to buy everyday things on credit and end up paying 10–18 percent interest on groceries you bought on credit two years ago.
It's better to save money in a small account for emergencies than to take out a loan or cash in your long-term investments. When you take out a loan, you will also have to pay interest. If you cash out your investments before they mature, you will not only lose the interest, but also some of the money you put in. This will also hurt your overall financial plan in a big way.
To build an emergency fund, you need to save money on a regular basis and resist the urge to use money from this fund for things that aren't emergencies. This money should be saved in a separate account from the rest. If you don't, you might be tempted to use these funds even if you just go over budget at some point. A big chunk of this emergency fund should be put into funds with low risk. This protects the value of your investment in case you need the money. Also, it should be very liquid, so that if you need cash quickly, you can get it easily.
How big the special savings account is for you will depend on your own circumstances. People often put away three to six months' worth of pay. But you will have to decide on a good amount based on things like how many people depend on you and how much you spend every month on fixed costs.
If you're single and don't have any financial obligations and can count on friends or family during a financial crisis, you might not need a lot of money in this fund. This is different from a person who has to pay for nursing care for his old parents while also taking care of a young family. The more people you help, the more likely it is that you will have costs you didn't expect or plan for.
When deciding on an emergency fund, you should also think about how hard it would be for you to find a new job if you lost the one you have now. In a two-income household, you should take into account what each person brings in when figuring out how much you should save.
You might not be able to get all of the money for your emergency fund at once. Think of it as a way to save money and add to the fund over time. If you get a tax refund, put the money in an account for "rainy days." Maybe some of the work bonus!
