It's important to have enough money set aside to handle emergencies and unexpected bills without having to incur debt or take away from your savings. However, it can be tempting to spend the money that you've earmarked for emergencies. To avoid temptation — and keep your financial plan on track — here are five rules for building up an emergency fund:
1. A rainy day fund is an essential part of any financial plan.
An emergency fund is a cash reserve that you have on hand in case of an unexpected expense. It's important to have an emergency fund because it can help prevent you from going into debt if you need to pay for something like medical bills or car repairs.
The first step in building your rainy day fund is determining how much money you need to put aside each month, which will depend on how much income you earn and whether or not there are any other expenses coming up soon (like Christmas gifts). The general rule of thumb is three months' worth of living expenses, but this number may vary depending on what kind of lifestyle your family lives--and how much risk they're willing to take with their finances. If possible, try saving up six months' worth instead; this way if something happens like losing your job or being laid off unexpectedly then there's still plenty of time left before having access again!
2. You shouldn't touch your emergency fund unless it's a real emergency.
It's not a piggy bank to be used for any other reason, and you should never dip into it unless there is no other option.
It's also important to understand that you can't touch your emergency fund if your car breaks down or if you need new tires on it--those are regular expenses that fall outside of what most people would consider an actual "emergency." The same goes for home repairs; if something breaks at home and needs fixing immediately, don't use the money in your EF! You can take out a loan from friends or family (or even get a credit card cash advance) instead so that these expenses don't affect how much money is left over in case something worse happens down the road (like getting laid off).
3. You should build up your emergency fund slowly, even if you have to sacrifice a little spending today.
If you're looking to start a fund, the most important thing is to get started. You don't need to wait until your money has built up enough for all of the emergencies in your life--just start small and keep adding to it as time goes on.
It's also important not to spend any of your emergency fund money unless it's an actual emergency; don't use it as a way of paying for things that are not urgent or necessary, like splurging on a new pair of shoes or taking a vacation trip when there are bills due next month!
4. Don't count on your employer to provide a safety net.
The next time you're in a job interview, take a moment to think about how much your potential employer will pay for your unemployment. If the answer is nothing--or if it's "we'll see what happens"--it's probably best to keep looking for work elsewhere.
Employers are not obligated by law or contract to provide any financial assistance during or after employment ends. They might choose to do so as part of their benefits package with specific employees (like managers), but this isn't universal practice among businesses and isn't guaranteed even when it does happen. As such, it's important that anyone who relies on an income from their employer has some sort of safety net they can fall back on should they lose their job unexpectedly; otherwise, they may find themselves without sufficient funds until they find another job or receive unemployment benefits from state agencies.*
5. Include at least one liquid asset in your emergency fund.
Liquidity is important because you might need to access your funds quickly, and investments can be hard to sell on short notice.
For example, if you put all of your emergency fund in stocks or bonds and then need money right away, it could take days or weeks until the market closes and they can sell those investments for cash. In that time frame, interest rates will probably change--meaning that even though you're getting back what was originally invested into those assets (plus any gains), it may not amount to much when factoring in lost opportunity cost from not having access to those funds during market hours.
Setting aside money for an unexpected event or expense is important, but setting an amount that is too high could prevent you from meeting other goals.
For example, if your emergency fund is set at $10,000 but all of your monthly expenses are only $3,000 per month, then this means that 7/12ths (or over 60%) of your income will go toward savings. That may be fine if you don't have any other obligations like saving for retirement or paying off student loans. However, if those things are important to you then it might not be worth putting so much money into savings right now.
The best way to determine how much money should go into savings each month is by calculating how much income will be left over after paying all other bills and expenses (including taxes). The goal here isn't necessarily having zero dollars left over every month; instead it's about finding a balance between saving enough money so that any unexpected events don't derail everything else in life while still leaving some discretionary funds available at the end of each pay period
You should always have an emergency fund, but it's important not to set too much money aside. You want to make sure that you can meet all of your other financial goals as well. For example, if you're trying to save up for a house or car, then having too much in your rainy day fund may prevent you from achieving those goals. If this sounds like something that could happen in your situation then consider setting up multiple funds instead: one for emergencies only (like losing my job) and another one with more flexibility so that we can invest elsewhere without risking our safety net falling apart.
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