Emergency Funds & Peace of Mind
Today, I want to talk about emergency funds. Last time I discussed budgeting, I spoke on the importance of sinking funds. Sinking funds are savings for a future purchase that you might not necessarily be able to afford all at once. You save up a little at a time in order to reach your ultimate goal.
An emergency fund can technically be a sinking fund as well. The functionality differs in that you only use the saved funds to pay for emergency issues, like if your vehicle breaks down or you need to pay an insurance deductible for instance. The amount you save is completely up to you, and what you need it for.
You could technically save an emergency fund for if you find yourself out of work in the future. It is recommended that you have at minimum three months of your salary saved up in case of loss of employment. This is a huge chunk of money, so unless you win the lottery or come into a trust fund, it makes sense to set up a sinking fund where you deposit a set amount of money each payday into a separate account for this purpose.
If you are just starting, a good goal to begin with is having $1000 saved for emergencies. It doesn’t seem like a lot, but once you reach that goal, you can set a new goal and keep adding to it. As with any sinking fund, you should keep a record of how much you contribute each paycheque and also, the balance. You should really try to remain consistent with these contributions, as that will have the highest success rate of increasing your fund. (Especially if you’re new to budgeting, regular consistent repetition is the best way to form a new habit). Try not to pull money out of this fund, unless it’s an absolute emergency. Once you start treating it like a “cushion”, your emergency fund won’t have the same importance or value to you and you will use it up before you know it.
I like having my money in the bank, but if you want, you can keep part of (or all) of this fund in cash at your home. Some people are worried about the security of their money if it’s in cash. (I.e. It’s easier to steal or lose it). I like to have cash on hand sometimes, but it really depends on how secure you feel. However, if you do have cash on hand, it’s not tracked by the bank and there is no wait time, since you already have it. You can just take it and use it instantly. I’ve heard of disaster states where people had money in their credit union, and all the credit unions were destroyed by hurricanes and unfortunately, the customers were out of luck. There are also online banks that charge lower fees and higher interest, so if you have a large emergency fund, that may be of interest to you! For an emergency fund, it’s best to keep the money where it will be most accessible to you.
I hope you enjoyed today’s article! Keep up the good work with your budget and we will see you next time!
Sandra
