“By failing to prepare, you are preparing to fail” – Benjamin Franklin
Precognition – a superpower that allows an individual to perceive future events before they happen. Unfortunately, superpowers are theoretical, and I cannot predict where my money will be spent in the future. Heeding the advice of Benjamin Franklin, we can plan for the unexpected by having an emergency fund. Life is unpredictable and fragile, and we are bound to face challenges that will present us with unforeseen expenses.
What is an Emergency Fund?
An emergency fund is money set aside to handle unexpected expenses such as:
If you were laid off from your job, how will you cover your monthly living expenses until you find a new job? If you faced an unforeseen medical expense, how will you pay for it?
To avoid costly expenses by incurring credit card debt or high interest loans, having access to an emergency fund will prevent you from facing harmful consequences.
How much should I set aside in my emergency fund?
This is a widely debated argument among financial planners, however, the decision is ultimately left to YOU.
Here are some guidelines to help you consider how much you should have saved in case of an emergency?
- Do I have enough money to cover my monthly living expenses for the next six months if I lose my job?
- Can I afford to maintain my lifestyle if I become sick and I am unable to work for the next six months?
- Do I have enough money to cover unexpected repairs to my car or home?
These questions are here to guide your decision making. Personally, I have saved for eight months of expenses. This cushion provides me with peace of mind knowing that I am prepared to handle any unforeseen expenses without setting me back on my financial plan.
Why is it important?
The Federal Reserve conducted a study during 2016 and found that 44% of individuals could not cover an unexpected $400 expense without borrowing money or selling something1. This statistic is alarming and demonstrates the importance of being prepared to handle unexpected expenses.
Even if you’re starting with $20, make an effort to prepare for the unexpected to provide you with peace of mind and staying on track with your financial goals.