budget

What Is An Emergency Fund and How Much Should Be In It?

An emergency fund is usually in a High Yield Savings Account (HYSA) that doesn’t have any fees. The “fund” is a set amount of money you never touch, except in emergencies.

The minimum is considered $1,000 since that will cover most things. A sudden dentist visit, a flat tire, or any other unexpected expense. There’s also extra peace of mind. An accident won’t immediately send you into debt. Backup cash is always useful.

Ideally, you already know what your budget is, and what your monthly expenses are. A “normal” emergency fund is 3 to 6 months worth of expenses. In case something major happens, like losing your job, the emergency fund will keep you stable for a while. A typical job search might take up to 6 months before your first new paycheck arrives. Job hunting, interviews, multiple-round interviews, onboarding, and other factors take time.

What’s best should be tailored to your individual situation. There isn’t a one-size-fits-all solution or dollar amount. An emergency fund could also be your annual health insurance deductible. This is typically $6,000 or so and varies by plan/region.

Why Budgeting Is Important and How To Create A Financial Plan

Creating a budget means tracking your income and expenses. How much money do you make each month, and how do you spend or save that money? Is there room for improvement? A budget puts you on a path to achieving financial goals. Budgets can be flexible, since they’re meant to keep people on track, and not set in stone. The important part is cash flow: being able to afford expenses as needed.

  • Short-term goals: Don’t overspend your money. Make sure it’s allocated properly so you don’t run out of cash.
  • Medium-term goals: Save money for large expenses or unforeseen major emergencies within the next couple of years.
  • Long-term goals: Properly manage debt, save money toward retirement, or other future goals.

Everyone needs a budget, from individuals to large corporations. Proper accounting can be game-changing or even life-saving. And it’s easier and faster to set up than most people believe. There are different ways to create a budget. Some people like to do it manually (Excel Spreadsheets, written notes, etc.) while others prefer budgeting apps to automatically do the heavy lifting. We have a list of potential tools at the bottom of this article.

Many finance experts currently advocate a “50-30-20 rule” for budgeting.

  • 50% of your income toward essentials/needs (rent or mortgage, bills and utilities, transportation, insurance, groceries, etc.)
  • 30% of your income toward “wants” (dining out, shopping, subscriptions, travel, hobbies, etc.)
  • 20% of your income toward debt repayment, savings, or investments

If you’re doing very well, you want increasing percentages of money to go into savings/investments/assets. At basic levels though: When it comes to savings, first aim for a $1,000 emergency fund. It’ll give you some breathing room if something bad happens. After that, aim for having 3 months of expenses covered. The most common recommendation for an emergency fund is 3-6 months of expenses. This is another reason to create a budget. If you don’t know what your expenses are, then it’s impossible to accurately determine the size of your emergency fund.

Overall, these budgeting guidelines are to help people get started. There aren’t strict rules and you probably don’t need to micromanage funds. You’ll have to create a budget based on your unique situation. Specifics are always subjective. After reading this entire article, you should know exactly what to do.