I think of an emergency fund as my savings that are left in an account reserved for ’emergencies’. For instance, if I lose my job my emergency fund could come in handy to keep me on my feet until I find another. There are lots of recommendations for how much money should be in your emergency fund. I personally am happy with approximately 3 months wages in my emergency fund. Here’s why I think that you should have one:
I find that having money saved for emergencies gives me a sense of security. I know that for instance, I can pay my rent for at least a couple of months regardless of the situation if I maintain my emergency fund.
If you don’t have an emergency fund you may need to get into debt to cover an emergency. For instance, if you car breaks down and you absolutely need it to get to work you might need to take out a loan to cover your unexpected travel whilst the car is repaired. This might not always be ideal.
You have a goal
If you have a goal that involves spending a good chunk of money having an emergency fund to help you avoid spending money that should be saved for your ultimate goal can be useful. For example, if you are saving up to buy a house you can use your emergency fund instead of dipping into the deposit you have saved up which can help you achieve your goal quicker.
Ultimately, an emergency fund is an essential part of budgeting and I think it is a smart move for any person to build one up!