How to build an emergency fund
Here’s how to build up an emergency fund to protect you from life’s many unpleasant and expensive surprises.
At some point life will knock you off your feet. If you aren’t prepared, the consequences can be devastating.
What starts with an unexpected bill often ends up snowballing into a much larger debt and any amount of debt can soon have a lasting impact on both your finances and your wellbeing. That’s why, if you don’t have one already, you need an emergency fund.
What is an emergency fund
An emergency fund is a stash of money for when life throws you a curveball. Some of the most common emergencies include:
- Emergency dental treatment
- Car problems
- Vet bills
- Home maintenance.
This fund is different from the rest of your money. You set it aside and don’t touch it unless there is no other way of covering the unexpected cost. If you’re worrying about whether or not to dip into your emergency fund, ask yourself one simple question: Is there any way I could have seen this coming? If the answer is no, then go ahead.
How much do I need to save in my emergency fund?
The amount you need for your emergency fund depends entirely on your circumstances. The good news is that you can start small.
Your first goal is to save €500. This might seem impossible, but with some simple budgeting skills, you’ll hit this target in no time. Once you’ve got €500 safely saved up, you are already protected against smaller emergencies like unexpected bills.
The next step is building up three to six months of living expenses. If you’re a freelancer, you’ll need to save up more. Saving this amount should be a priority. Without it, an emergency could force you to use a credit card or take on high-interest debt.
For most people, three to six months is enough for financial stability. For people that place high value on stability, there’s always the option of building a whole year’s worth of living expenses.
How can I build an emergency fund?
Your emergency fund is based on your monthly living expenses. Living expenses are absolute necessities that you can’t live without such as:
- Rent or mortgage payments
- Utilities like gas, water, internet and your mobile phone plan
Go through your account and add up how much you spent on essentials and average them over six months. This is a good way of working out how much you will need to aim for.
Even though you shouldn’t touch this money unless there’s an emergency, make sure that you can access it immediately in times of emergency. A secure account with a reputable provider will usually do the trick. With Nuri your funds are protected up to €100,000 in a full, German bank account.
Your emergency fund gives you more than just protection
Once you start working on your emergency fund, you’re already well on your way to building a better financial future. But building your fund doesn’t just give you protection. You’ll learn important money skills along the way that will continue to serve you for the rest of your life. Many people even find it easier to save after they hit their financial protection goals.
But that’s not all. This protection against the unexpected also means you can forget about most of life’s financial worries. Through this process you will develop greater financial and emotional resilience, as well the power to control your own circumstances.
Building your emergency fund is just the beginning. Once you’re in charge of your finances you can soon make the transition from saver to investor. At Nuri we think bright financial futures are built on strong foundations, that’s why we give you everything you need to grow your money, all in one place.