An emergency fund is exactly that – it’s the money that will tide you over when an emergency happens.
This includes losing your job, having to pay for urgent home or car repairs, and to pay for medical and dental emergencies.
Because it’s meant to be accessed quickly, you should keep your emergency funds in a liquid bank account.
How much do I need?
First you should know how much you spend in a month.
Keep track of your expenses for three to four months.
You should already start saving some money while you do this exercise.
An emergency fund should only be used to cover the necessities and not the luxuries, which means bills such as transportation, utilities, groceries and your rent or mortgage.
You should not be using this money for holidays or shopping.
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How much should I save?
Once you know your monthly expenses, start working towards saving three months’ worth.
For example, if you need $3000 a month to cover all your bills, you should have $9000 squared away for emergencies.
Having that amount will give you peace of mind that you can weather the storm until you get back on your feet.
While it’s a good start, three months’ worth of savings is not nearly enough to cover larger costs.
For example, if you lose your job, it may take you several months to find a suitable replacement.
Which is why you should keep going and work towards having six months’ worth of expenses set aside.
One financial expert, former TV host Suze Orman, even advocates setting aside eight to 12 months’ worth of expenses to feel truly secure.
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How can I start saving money?
No matter how much you earn, try sticking to the 50-20-30 rule.
This means not more than 50 percent of your income should go towards living expenses and essentials, while 20 percent should go towards savings, investments and reducing your debt.
The final 30 percent should be used for discretionary spending, such as travel, gifts and entertainment.
Adjust your spending accordingly using the guide.
For example, if you’re consistently exceeding 30 percent of your pay on discretionary spending, you might need to find cheaper entertainment alternatives or cut down on nights out.
And if you’re just starting out, you might want to save a little more aggressively in order to squirrel away that emergency cash.