What happens when your car needs a significant repair? Perhaps you should have planned on taking your child to urgent care, and now your budget is tight. An emergency fund could help you get through those unexpected and often expensive moments with the best outcomes. There is no way to know what could occur, but having money tucked away could help to alleviate some of your frustrations.

What is An Emergency Fund?

An emergency fund is a specific account with money in it to use for just emergency situations. You can keep an emergency cash fund close at hand, such as in your home. However, there is a risk here. Anyone could take those funds, and you could not prove they were yours. It's best to establish a savings account to keep this emergency reserve of funds so that it is available to you when you absolutely need it.

What is an emergency, then? The goal of an emergency fund is to have money available to you when something occurs that is expensive and too hard to pay for out of your budget. A true emergency isn't an instance where you want to buy something on sale but rather a situation where you need money to help you get through a problem without having to borrow from others or use loans.

Emergency funds could help you with the following:

• Loss of income for some time
• Medical bills
• Car repair bills
• Home repairs that are essential

Having an emergency fund is like having a backup in case something occurs and you need money right away. It should not be used to fill in your budget, but it could help when you may have lost some time at work or have a new debt you'll have to pay out of nowhere.

Why Do You Need an Emergency Fund?

Consider why you need an emergency fund. You may now have a savings and checking account that provides you with all the money management tools you need. However, an emergency fund can take things further, providing a way to safeguard against the future.

Consider a few common reasons why you need an emergency fund:

• An emergency cost you could not have planned for could through off your budget for months or longer, depending on how big it is.
• You may have to resort to using credit cards with high-interest rates to cover your emergencies if you do not have the cash you need to manage that unexpected debt, making it even more expensive for you.
• If you pull money from savings or your retirement to cover this type of emergency, that costs you, too, and it means you may need more funds to grow those investments over time.

An emergency fund often helps you stick with your goals and not worry about what could happen. You have a plan in place to minimize those risks.

Still Unsure You Need One?

A company layoff can be challenging and stressful for the affected employees and the company itself. Even the best employees can find themselves without a job when an economic downturn occurs. However, an emergency fund can help mitigate the financial impact of that layoff.

Here are a few ways in which an emergency fund can offset the impact of a job loss:

• Provides a financial safety net. An emergency fund can help cover essential expenses, such as rent or mortgage payments, utilities, and groceries, while employees search for a new job or pursue other sources of income.
• Reduces the need for debt. Without an emergency fund, you may need credit cards or loans to cover your expenses when you're out of work. This can lead to significant debt, which can be difficult to repay. However, an emergency fund can help reduce the need for debt, allowing you to maintain financial stability until you find new work.
• Relieves stress and anxiety. A job loss can be an emotionally challenging experience, and the financial uncertainty that comes with it can add to the stress and anxiety you may already be feeling. An emergency fund can provide peace of mind, knowing you have a financial cushion to fall back on.
• Helps with retraining and job search. An emergency fund can also help with retraining or further education costs, increasing your employability and helping you find a new job more quickly. It can also cover expenses associated with job searches, such as travel costs, interview outfits, and resume printing.

In summary, having an emergency fund can help offset the impact of a job loss by providing a financial safety net, reducing the need for debt, relieving stress and anxiety, and helping with retraining and job search expenses. Employees with an emergency fund may be better equipped to weather the financial challenges of a layoff and emerge more quickly and successfully on the other side.

How Much Do You Need?

Many people ask how much they need to have tucked away into an emergency fund. There are two significant steps to consider.

Put $1,000 Aside

For most people, the first real goal is to get about $1,000 in an emergency fund and leave it there. This amount of money may help cover your costs for an emergency bill that becomes due or may help you meet some basic expenses quickly.

The $1,000 goal is an initial goal, which is not likely enough to cover your needs if you lose your job, and it's meant to be a starting point to help you to build from later.

Aim for 3 to 6 Months of Salary

The second goal is to work to build up your emergency fund, so it has 3 to 6 months' worth of your salary in it. That means if you earn $6,000 a month, you'll want to put away at least $18,000 to $36,000 into an account that's kept for emergency needs. This amount of money could seem well out of reach, and that's okay if it does.

Over time, you can work to build up your emergency fund to reach this level. The key goal is to have one in place so that you can begin to build some financial stability.