- What is an emergency fund?
- How much is enough?
- How to build an emergency fund
Emergency funds are a powerful tool to manage your finances. Having an emergency fund will help you with unforeseen expenses and avoid borrowing money with interest. But how do emergency funds work?
What is an emergency fund?
An emergency fund is a “set-aside” money fund that is meant to help you cover any unexpected expense. This fund works as a backup plan to help cover costs if you become unemployed, have medical bills, home repairs, or any other emergency expenses.
How much is enough?
Your emergency fund will vary depending on your income and expenses, but ideally, it should cover three to six months of your total expenses. Keep in mind that your emergency fund is intended to help with your monthly expenses. It is not a fund to replace your entire income.
How to build an emergency fund
You should start building your emergency fund by setting saving goals. This will help you map out how much money to set aside depending on your personal finances. You should then compare your expenses to your income. By doing this, you will have a better idea how much you can save month to month. Lastly, it’s best to automate your savings to help make sure you continue to set money aside.
IN A NUTSHELL
Emergency funds help protect your finances and they will help you cover any possible unplanned expenses that may arise. When building your fund, you should consider your monthly income and expenses in order to create the best plan for yourself.