You’re planning on jumping into the world of investing. Before you make any big changes to your financial portfolio, you should make sure that you have this important investment first: an emergency fund.
Emergency Fund
An emergency fund is a collection of personal savings reserved for unplanned, urgent expenses that don’t fit within your normal monthly budget. It’s ideally used for car repairs, home repairs, and medical appointments that need your immediate attention.
Why Should You Have an Emergency Fund?
An emergency fund is a key investment for gaining financial stability. With a substantial fund sitting in your portfolio, you can be confident that you can handle any unexpected expense that comes your way without disrupting any of your essential spendings. Using your savings to cover an emergency won’t have any impact on your ability to pay your bills for the rest of the month. Everything will continue as normal.
What Can You Do Without One?
Without an emergency fund, you might be at a loss about what to do when an emergency expense crops up. If you don’t have the savings, you’re going to scramble about how to pay for it. Do you use funds from your budget and risk not being able to pay your bills on time? Do you call a friend and ask whether you can borrow a personal loan? Do you ignore the problem to save money?
A couple of options for dealing with an emergency expense are to put the charge onto your credit card or to use a personal line of credit. Both of these borrowing options allow you to cover the urgent expense quickly and then manage steady repayments later on. It’s important to learn the main differences between a line of credit vs credit card — the details could help you decide which one to turn to when you don’t have enough savings to rectify a problem.
How Can You Start an Emergency Fund?
So, if you don’t already have an emergency fund in the works, you need to start making this investment. How can you start?
First, take a look over your monthly budget to see how much you can reasonably set aside for emergencies this month. Once you’ve found the right amount, you should move it into a separate savings account — then, you’ll want to repeat this step every single month. To make things easier, you can automate your emergency savings so that your checking account automatically transfers the funds into your savings account. This way, you’ll never miss a payment.
As time goes on, you should consider moving your emergency fund into a high-yield savings account. The interest in this account will help the contents of the fund grow over time, increasing the size of your safety net bit by bit.
How Much Should You Save?
Ideally, you should aspire to have a significant amount of savings in your emergency fund. You’ll want enough to help you get through major emergencies, like losing your job or falling ill. To guarantee your financial security in the worst of times, you should try to save three to six months’ worth of household expenses in your fund. It could take you years to reach that goal, but it will be worth the protection it offers.
An emergency fund is one of the best financial investments that you can make. You should start putting yours together right away.
