What happens when you lose your job, get sick, or have an expensive unforeseen expense? How do you stay afloat financially? Do you go into more debt or is there another option? Two words - Emergency Fund.
Investopedia.com explains the importance of an emergency fund well. "The purpose of the fund is to improve financial security by creating a safety net of cash or other highly liquid assets that can be used to meet emergency expenses, as well as reduce the need to draw from high-interest debt options, such as credit cards or unsecured loans—or undermine your future security by tapping retirement funds." That’s quite a mouth-full, so I’m going to break it down into pieces.
An emergency fund is really just another way to say savings, and most people place this money (or cash) into a savings account. Emergency expenses are any type of unforeseen expense or life-altering situation that you can’t cover within your normal budgeted spending.
So in these types of situations, how do you handle your finances when it feels like everything else is falling apart? You want to tap into that Emergency Fund that you’ve established for times like these rather than being forced to rely on more debt.
if you're skimming this article looking for the magic number, I wish I could tell you it’s the same dollar amount for everyone. But this is not a one-size fits all. So how can you know exactly what you need saved? Let’s go through it together in the video below.