Why you need an Emergency Fund

In life you should expect the unexpected, and this is why you need an emergency fund. The best you can do is to prepare for emergencies that require access to additional money and having an emergency fund is the ideal solution.

Financial emergencies can come in the form of job or income loss, significant medical expenses, home or auto repairs or something you've never thought of. The last thing you want to do is be forced to rely on credit cards or a loan which could simple compound the problem.

So the big questions usually is: How big should my Emergency Fund be?

Most experts agree that you should have somewhere between 3 and 6 months worth of living expenses set aside in your emergency fund. The reason you want to have 3 to 6 months of expenses saved up is that the most common reason reason for the need of an emergency fund is due to a sudden loss of income. ( For city workers this comes in the form of 1) going without a new contract 2)loss of spouses income). When these events happen you still have bills to pay each month, so a few months of extra money can help until that income is replaced again. It is best to plan for a worst-case scenario so that the smaller emergencies such as replacing the hot water heater than just broke will seem easy to cover.

Start Small

If you don;t currently have an emergency fund or find it difficult to save money,the key is to start small. You have to realize that accumulating one month's worth of expenses will take some time, let alone 3 to 6 months.
If you set your immediate goals to be small and manageable you will have a better chance in reaching them.
The best way to start is to speak with a financial planner, and see what your monthly cash flow looks like. Once you know what is coming in ,and what is going out you can then figure out how much can be set aside on a regular basis to build your emergency fund.

If you feel it is to difficult to begin saving simple start with a small amount. Maybe you begin with $10 a week initially. While this amount won't add up all that quickly, the important thing to start putting something away and make it a habit. After a few weeks you won't even notice the $10 missing so you can start to bump it up to $15 or $20 a month and so on. You will begin to get used to that money not being there and can then slightly increase it again.

Another question: Where do I keep my emergency fund?

You can start with a saving  account or money market. It is important to keep it simple and make sure the account is liquid and accessible. If you want a little less access to it, open up a money market though a financial planner.

I hope this helped you understand how simple yet important this part is to creating the beginning of a solid financial plan.