A good financial plan should include an emergency fund. An emergency fund, which can go by many other names including “just-in-case money”, “emergency money” and “if something bad should happen money”, is money that can be used to cover unexpected emergencies when they arise.
When I got my first full-time job, I started an account which I decided to add a very small amount of money to each month. At the time when I opened that account, it was never my intention to call it my emergency fund. In fact, my emergency fund could have easily been made up of my little savings that I had accumulated.
It was only last year that I decided that I really should have an emergency fund, just in case I ever found myself in financial difficulties. Thankfully, that has never happened, but I know that I would be financially prepared to a point. So I decided to make an existing account my dedicated emergency fund and to this day, I continue to add to it.
Starting an emergency fund is not necessarily hard to do. Some people have suggested depositing a large sum of money to get the fund going. Others believe that adding a little bit at a time is more realistic. How you choose to start the fund is totally up to you, and you are the only one than can decide how you want to build the fund and how much you can afford to contribute to the fund. The emphasis, in my opinion, should be on making the decision to start the fund and recognising that there is a need for one.
When you have decided that you should have a fund and how you will contribute to it, you should decide where you will save it. There are so many options including a regular savings account or even in your home safe. Some people even keep a portion of their emergency money in a bank account and the remainder home (I wouldn’t advise this, unless you have it in a very, very, very safe place where it can not be easily found). But you should keep the money where you would have easy access to it.
I think the rationale behind an emergency fund is to have enough money to cover you for a while should a really big emergency pop up. Some people choose to have a two month fund, which means that ALL of their expenses can be covered for two months. Others tend to be more forward thinking and accumulate savings to cover them for eight months to one year!
After you’ve decided to start that emergency fund, you must be committed to leaving that money alone. There will always be the temptation to withdraw a little bit here and there, so self-control is extremely important. When the need arises, you will also need to determine what qualifies as an emergency. For me, emergencies include doctor visits, a job loss (this is the most important thing, especially if you have a mortgage or other loans), or something of that degree. A shopping spree because your favourite store has a sale or you want to buy weave to go see Vybz Cartel, are NOT emergencies.