Relax? Yes, if you’ve got an “emergency fund”, you have a reasonable shot at a state of non-panic when financial emergencies occur.
The first thing to do here is to define “emergency”. Emergencies are situations that interfere with your basic needs (shelter, food & water, transportation, etc.). Emergencies are not situations that interfere with your social life – they are not trips you want to go on, and they are definitely not late-night hunger or caffeine trips (yes, even if it’s your second consecutive all-nighter during exams or sick kids). Emergencies are also not things you can see coming (like those tires that your car is going to need, or that swiss cheese roof on your house you’ll need to fix in the next two years)
You’re going to want to set a certain amount aside for an emergency or two. How much, you ask? Most of your run-of-the-mill emergencies run $300-$500 (broken major appliance, unexpected car repair, etc.), so start by getting enough in your emergency savings to cover one of those things.
When (yup, you caught it, I did not use if) an emergency happens, you can use your emergency savings (so you don’t have to run to a credit card and get yourself in trouble), and then get to work building up your emergency savings back up to its original level.
Even More Emergencies
That doesn’t mean that we’re done with savings, though. Here are some other things that it’s smart to save for so you don’t get caught in the world of credit:
- When it rains, it pours, right? Make your next emergency savings level enough to cover 2-3 of those run-of-the-mill emergencies at the same time.
- Want to reach a new level of emergency savings? Try the “mild catastrophe level”. This is enough to cover 3 months of living expenses in case all your income ceases due to job loss or sickness. This should “buy” you enough time to find that next job and/or recover so you don’t have to add financial stress to your mild catastrophe.
Once you’re comfortable with your level of emergency savings, get working on your other financial goals – save for other future needs, or get to giving some of that extra to the needs that are out there!