What Is an Emergency Fund — Everything You Need to Know

Whether it’s an urgent medical expense, an unforeseen home repair, a car breakdown, or any other unforeseen expense, you are just an emergency situation away from slipping into debt.

And if you’re already too tight on cash, finding ways to fund these expenses can seem impossible. This is where an emergency fund comes into play. 

But what is an emergency fund? How do you create an emergency fund? Continue reading to find out everything there is to know about emergency funds so you can make safe financial decisions.

What Is an Emergency Fund?

An emergency fund is exactly what it sounds like — a lump sum of money set aside to bear any unexpected expenses. It is basically a bank account with money that you can access in case of an emergency. 

While there is no specific description of what counts as an emergency, you must only access your emergency fund when it is absolutely necessary. You should only use it when you really need it, such as making home or vehicle repairs, paying medical bills, or getting groceries when you are unemployed.

For instance, you shouldn’t use your emergency fund to upgrade your car. But you can use it to make a repair when your car breaks down. 

What Is the Goal of an Emergency Fund?

An emergency fund is designed to offer everyone some financial security. It exists to fund your emergency expenses that you don’t usually account for in the monthly budget. It keeps you from getting into debt by providing a cushion to bear unforeseen expenses.

Additionally, an emergency fund offers peace of mind. When you know that you have a safety net to rely on in times of need, you can focus on the important things. There’s no financial stress.

What’s more, having an emergency fund gives you the freedom to make tough decisions during financial turmoil. For instance, investing time in a professional certification and waiting for a good job offer, rather than accepting the first one you get to make ends meet.

How to Create an Emergency Fund?

In order to maintain financial stability and avoid stress, it is important to build an emergency fund from the start. 

Here’s how to create an emergency fund:

Step 1: Find Out How Much You Can Save

The first step towards building an emergency fund involves coming up with a reasonable amount that you can save each month. To do so, you will need to review your budget or create one if you don’t already have it.

A look at your budget will allow you to determine how much money you have left every month. Now allocate that towards your emergency fund. A good emergency fund should be enough to cover a minimum of three months’ basic expenses.

But if you can’t save that much, you can start with a small amount. Even a contribution of $100 towards your emergency fund each month is enough. 

But don’t overdo it. For instance, you should not cut back on the essentials just to save for your emergency fund. However, you can consider eating in or watching a movie at home to save more. Continue to save until you have enough funds to cover at least three months’ expenses.

Step 2: Set Up Automatic Transfers to Your Emergency Fund

Now that you have figured out how much you can save every month, the only way to effectively save is by setting up automatic and recurring transfers to your emergency fund. 

As soon as your paycheck comes in, your savings will automatically be deposited into your emergency fund account. This way, you will not be tempted to spend that money on unnecessary things.

In addition to helping you save money effectively, automatic transfers can also save a lot of time. Otherwise, you’d have to manually transfer your funds from your checking account to your emergency fund each month. 

Step 3: Track Your Savings Goal

Once you have automated your savings, don’t forget to monitor the progress. Make sure to track your monthly progress to see how far along you are in achieving your savings goal. 

If your income has recently increased or your expenses have decreased, consider increasing your contributions to the emergency fund to reach your goal earlier.

On the other hand, if your expenses have increased and you are barely living hand to mouth, you can consider decreasing the amount you contribute towards the emergency fund. Keep making adjustments according to your current financial situation.

If you are short on cash, you can also apply for a personal loan to meet your immediate cash needs. Cash in Minutes offers same-day funding with easy repayment terms.

Good luck!