A lot of us think that IT IS FINE.
We don’t need an emergency fund because we wouldn’t be that unlucky to be a victim of a major emergency.
But emergencies happen more often that you think. And even if an emergency doesn’t happen to you, you will feel a lot better mentally and emotionally if you have an emergency fund set aside.
What is an emergency fund?
An emergency fund is a stash of money set aside to cover unforeseen expenses. Life is full of surprises—some pleasant, like a sudden opportunity for travel, and others not so much, like major home repairs, medical bills, or a sudden job loss. Having a financial cushion helps ensure these surprises don’t derail your financial stability.
Why you need an emergency fund
- Peace of mind – Are you an anxious person? Knowing that you have funds set aside for emergencies can significantly reduce stress and anxiety about the future.
- Avoid debt – Without an emergency fund, you might need to rely on credit cards or loans to cover unexpected costs, leading to debt accumulation.
- Financial security – It acts as a buffer, allowing you to handle emergencies without disrupting your savings or long-term financial goals.
How much should you save?
A common recommendation is to save three to six months’ worth of living expenses. This amount provides a safety net for most common emergencies. For those with irregular income or higher financial responsibilities, aiming for closer to six months—or even more—might be prudent.
Steps to building your emergency fund
- Set a goal – Determine the amount you need by calculating your monthly expenses and multiplying by the number of months you want to cover.
- Create a budget – Identify areas in your current budget where you can cut back to free up money for your emergency fund.
- Start small – If the target amount feels daunting, start with a smaller goal, like HK$10,000 or one month’s expenses. Gradually increase your target as you get into the habit of saving.
- Put the money in a separate account – Keep your emergency fund in a separate, easily accessible savings account. This helps avoid the temptation to dip into it for non-emergencies while ensuring you can access the funds quickly when needed.
- Stay committed – Regularly review and adjust your savings plan as needed. Remember, building and maintaining an emergency fund isn’t a one-off exercise, it’s a lifelong habit.
Maintaining your emergency fund
Once your fund is established, it’s crucial to maintain it. Whenever you use money from your emergency fund, make replenishing it a priority.
Remember – putting money into your emergency fund serves two purposes – the money saved is still yours, AND you get the bonus of feeling more financially secure and emotionally prepared for life’s ups and downs.