What is an emergency fund and why you need one
Unless you have vast untold riches, then there is a constant financial juggling act when it comes to raising a family.
We know roughly how much money it takes to raise a child to the age of 18 in the modern world. It’s a figure large enough to make you wince; can it really be that much? Of course, there are shades of grey in there, with the super-rich also being surveyed and throwing off the overall spend. But in general: parenting is expensive. Worth it – absolutely, 100% worth it – but expensive.
There seem to be costs at every turn; costs that, pre-parenthood, you never would have known to account for. School uniform, health checks, school trips and a million and ten other things all demanding that you open your purse and let the money fly free from it. Couple this with the general cost of running a home – a task that is becoming more expensive, not less – and you’ve got a recipe for endless financial stress.
People in the 21st century are saving less than any other generation that has gone before them. There’s a good reason for it too; a generally stagnant global economic outlook means that there is less money in the bank after all bills and expenses have been taken care of. Owning a property is more expensive, and bills only ever seem to go one way: up. Put it all together, and the idea of finding a way to save while raising a family is… well, it’s little more than a fantasy.
We’re not going to focus on the idea of long-term savings. That’s a financial decision for another day, very much dependent on the needs of your individual situation. However, it’s time to consider what would once have been referred to as a “rainy day” fund – and we’re going to call an Emergency Fund.
What’s is an Emergency Fund?
It’s a subset of your savings that is not meant to be locked away; you’re meant to be able to access it. Of course, it’s not designed to be used for a weekend away for a bit of fun – it’s purpose is far more serious than that.
It’s used for those occasions and mishaps that it’s not possible – or realistic – to budget for. It’s the miscellaneous; the circumstances outside of your control but which will inevitably happen. It’s there to prevent you needing to rely on credit cards if you find yourself needing access to money with little to no notice to budget for it.
When should an Emergency Fund be used?
There are a variety of scenarios in which such a Fund can be wielded.
If your child has glasses, then you should be budgeting for optical care as part of your normal monthly budget. You wouldn’t dip into an emergency fund for an annual eye check. You would dip into an emergency budget if your child announces they have been trampolining a little too hard and they’ve broken the arm off their glasses. You’d use the money in the Emergency Fund to pay for the glasses to be repaired; if they are beyond repair, then use the money to fund a cheap will-do-for-the-moment replacement.
An Emergency Fund doesn’t just have to apply to people. The cost of running a dishwasher – water, the tablets, and salt – should be part of your monthly budget. You wouldn’t use an emergency fund to cope with these costs. However, should your dishwasher decide it doesn’t fancy doing much dishwashing and break down, then you would dip into the fund. It’s not a time to be lavish and treat yourself to a whole new washer of course; proper use of an Emergency Fund would involve a repair from a repair services for washing machines that gets you back up to full function. It’s a survival fund, not a use-the-excuse-to-splash-out fund!
Controlling your use of an Emergency Fund is essential to working well within it. It’s not an excuse to spend the entire fund if the circumstances of life present you with an excuse to do so. You have to be tight with the purse strings, keeping in mind that it’s not just there to rectify a single emergency. You might need the fund for a second reason in the same week – so treat it with respect.
How much should an Emergency Fund be?
The amount depends on your financial situation, but a good generalised starting point is $1000. You can make this higher if you’re in a high-earning bracket; or lower to suit your circumstances. The baseline point is around $250 for an Emergency Fund to function as it should.
How do you save for one?
By having a few lean months! An EF is not like traditional savings. You’re not squirreling the money away with no intention of seeing it again. It’s more flexible, to be used in the event of a problem you don’t have space in your monthly budget to rectify.
That means it needs to be built up as quickly as possible. Depending on your financial circumstances, you should be able to save up the baseline $250 within three months. Then continue to push up to the $1000 mark, making the savings wherever you can. You might have to go without treats for a few months while you get it established, but when it is, you don’t need to continue saving. And if in those months, you find that you do need the funds, then you do still have access to them.
What if you don’t need the fund?
Ideally, you won’t! There’s no need for complaints if you don’t have an emergency requiring you using the fund in such a way. Just make sure you’re getting the best of it by using as high an interest savings account as you can. That way, if you don’t have to dip into it, then you might actually make some money on your financial prudence. It will only be a small amount, but it’s something you wouldn’t have had without an emergency fund.
What are the Key Benefits of an Emergency Fund?
If you still need convincing, then the key benefits are: peace of mind and not having to rely on credit in the event things go wrong. For those reasons alone, it’s worth pursuing.
Article provided by A Baker
