You never know when an emergency may arise and you need some quick cash to get yourself out of a jam. Situations like a loss of job, sickness, car issues, urgent house repairs or child/pet sickness create a lot of stress and worry. But being prepared for those types of circumstances will help to ease stress.
Knowing you can get yourself out of a crisis will help you sleep at night, but it takes time to build an emergency fund and financial planning is a key to success for any renter. Here are some common questions and answers from renters about emergency funds.
What Is An Emergency Fund?
An emergency fund is easily accessible money that’s saved with the intention of getting yourself out of an unexpected emergency. This is separate from other savings goals like education, retirement, or a down payment. But it must be factored into your savings plan so you can have an emergency fund while reaching your other financial goals.
It must be stored safely — a savings account is preferable to the back of your nightstand drawer. Working with a financial institution may also help you collect a small amount of interest, instead of your money just sitting in an account.
When Should You Start Saving An Emergency Fund?
The best time to start saving for anything is right now. Unexpected expenses never come at a convenient time, so you shouldn’t wait to start saving. However you don’t have to create your emergency fund all at once.
Put a small amount of money away each month or each pay period and build your fund slowly without sacrificing money from other parts of your budget. You can contribute unexpected income like a bonus at work or a cash gift. However you decide to grow your emergency fund, make sure to set a savings goal and stick to it.
How Much Should Your Emergency Fund Have?
There’s no magic number or fail-safe formula — it depends on your income and lifestyle. You’ll want to consider your other savings goals, debt, cost of living, job (how stable it is or how easy it would be to find a new one), dependents and retirement plans. Find a happy medium between an amount that will ease your worries and what’s realistic for your current financial situation.
Generally, you’ll want to aim for saving the equivalent of three to six months of expenses, but you could save up to 12 months. Those expenses can include rent, utilities, debt payments, food, insurance, transportation and essentials (toiletries, clothes, etc.). If there’s a person who could support you financially — like a parent, family member, partner or friend — you may be able to rely on them as part of your emergency fund as well.
Once you calculate your expenses and set your savings goal, try to automate your savings. You may not even notice a small amount of money being taken out of your account each month.
Finally, make sure to put your emergency fund in an easily accessible location. Don’t put it in an investment account that you can’t withdraw from for a certain amount of time or a financial institution that doesn’t offer online banking.
Having an emergency fund will give you peace of mind immediately and in the long term. It’s one important component of a holistic savings plan that may include other things like a vehicle, vacation, or college tuition. And if you want to save for a down payment, check out our blog on how to save to purchase property while renting.