It is important to have an emergency fund in order to safeguard your personal financial goals. Therefore, setting money aside for unexpected expenses and difficult times is absolutely necessary.
Open a separate savings account for emergency savings only with your bank
Define the total you want to save i.e., how much money you should put aside from each pay cheque
Pay off any credit card debt
The general recommendation by experts is to have three times your monthly income set aside for emergencies, or even better, six times your monthly income
In this lesson, you are going to learn about setting up an emergency fund.
Besides your current account (transactional account) for deposits and withdrawal of your income and your expenses, there are a number of other financial tools you should have in place for basic money management. One of them is a personal emergency fund.
How can I set up my emergency fund?
Instead of putting your extra cash in a household mason jar (where it’s tempting to pick out five euros for a coffee or two), we recommend opening a separate savings account (either with your own bank or another one) as your emergency fund. This account should be separate from your daily spendings, i.e., you should not be able to spend any of it by using your normal bank card. Setting up a savings account with your bank is relatively easy, you can either do it online with your banking app, or call them and have it set up within minutes. If your bank doesn’t offer an additional savings account, you could also look for free bank accounts and use such an account for your emergency fund.
Before you start setting up your savings fund for emergencies
While it is important to start your emergency fund as soon as you can, it is also important that any debts you do have should be paid off before you start your emergency fund. This rule also applies before you start investing in general. Paying off your bank overdraft and keeping expenditures with your credit card at a low level is an essential step in developing healthy financial habits.
How much should I save?
The first step of setting up any emergency fund is calculating how much you can actually set aside each month after receiving your salary and making sure you can still pay your bills and necessities. Simply write down the amount in your notebook or excel spreadsheet for your budget for the week. See our previous lesson in the Bitpanda Academy on how to create a budget for more details.
Based on the budget you have, you can then decide how much you want to put into your emergency savings or investment account. One possibility could be for example, 20% each month. Of course, if you manage to set aside more, even better! Once you have figured out which amount should go towards your emergency fund each month, make sure that you set up an automatic transfer from your bank account to your savings account the day after payday.
An emergency fund is absolutely necessary to alleviate the burden of financial stress.
Example of how much to save for an emergency fund
The overall recommendation is to have at least three times your monthly income set aside for emergencies, or even better, six times your monthly income. The reasoning behind this is in case of an unforeseen emergency, you can live off your emergency fund for three to six months. This rule is of course influenced by additional factors, such as social security and government aid in the country you live in. But no matter your situation: at least three times your monthly income is a good rule of thumb.
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Maybe you are automatically thinking “I can’t save that much!” However, the aim of an emergency fund is not to accumulate a lot of money quickly, but to have this “cushion money” set aside to give you peace of mind and to have insurance in case the unthinkable happens. At the end of the day, having an emergency fund is all about planning for the future and the unpredictable events that life may throw at you, as well as potentially growing valuable interest.
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