Emergency funds are savings specifically set aside to cover unexpected costs, like medical bills or car repairs. They are important because they can keep you from falling into debt or being unable to pay your bills if something unexpected comes up.
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This video explains the importance of establishing an emergency fund to handle unexpected financial burdens. It highlights the difference between predictable expenses and unforeseen crises, recommending a savings goal of three to six months of essential expenditures to ensure financial stability during hardships.
In life, there are things that we expect
and there's other things that we don't expect.
When we think about it from a finance point of view,
the things that we might expect is,
okay, we're going to get a regular paycheck
because of our work.
And we're going to have regular payments for things
like our rent or maybe our car payment or insurance.
But then there's the unexpected,
things that for the most part,
most of us wish don't happen.
I guess there could be unexpected positive things as well.
But unexpected negative things
are maybe your car breaks down.
And that's pretty important
because your car breaking down
isn't just a nice to have thing or nice thing to fix.
You probably need your car to get to work
and make your money.
You might have an unforeseen medical expense
for you or a family member that you have to pay.
And it could actually affect how much income
you or your family is able to get
if you have to take off of work
because of that medical event.
And so because of that,
it is very good to save for a rainy day
and have that emergency fund.
Now, most experts will tell you
that you should have an emergency fund
that's equal to about three to six months
of your needed expenditures.
We've talked about the 50-30-20 rule,
which is 50% on needs, 30% on wants,
20% of your after-tax income
that you're bringing in for savings.
And that savings, first and foremost,
should be for an emergency fund
until you have a nice emergency fund,
and then you can think about other things.
So let's say there's a situation
where your needs are $2,000 a month.
That's your rent, your car payments,
your insurance, your groceries,
the core groceries that you really, really need.
If it's $2,000 a month,
then an expert would say,
hey, you need three to six months there.
So that would be $6,000 to $12,000 of an emergency fund.
If, for whatever reason, you lose your job,
your car breaks down,
you have to help out a family member,
then you're going to have some reserves
to be able to weather that actual storm.
Now, above and beyond that,
obviously, it's even better to save,
and then you can also think about that
as even a bigger emergency fund
or even put it other places,
but it's really important
to keep this type of money around.
Otherwise, you could find yourself in a tough situation.
