Why Should We Have an Emergency Fund? and How Much?

One thing we know for certain about life is that it often doesn’t go as planned. With this in mind, we must prepare ourselves financially to avoid being derailed by unexpected events. Making the decision to embark on your financial freedom journey is a significant step, and it requires adopting a new perspective on managing money. The last thing we want is for unexpected expenses to slow down this progress.

To start, it’s crucial to create a budget and identify your monthly expenses. (We’ll assume you’ve already done this—great job! Keep up the excellent work!) Once you know what it takes to cover your monthly expenses, you can determine how much you need to survive during emergencies. When I say “survive,” I mean ensuring that the essentials are covered: shelter, food, transportation, and utilities. This initial emergency fund is designed to keep your household running and your family safe, providing the security you need to move forward in your financial freedom journey.

The amount for your starter emergency fund doesn’t have to be substantial, and that’s perfectly fine. Its purpose is to prevent minor setbacks from derailing your plans. After paying off debt, you can shift your focus to building a more comprehensive emergency fund. This fully established fund should cover three to six months’ worth of expenses.

If both you and your spouse work, you might lean toward a three-month emergency fund because the likelihood of both of you losing your jobs simultaneously is relatively low. However, if you are a single-income household, a six-month fund is more appropriate. Ultimately, this decision should be made collaboratively with your significant other, ensuring you both feel comfortable with the amount. While it’s essential to have adequate savings, avoid saving excessively at the expense of your financial goals. Remember, your hard-earned money should also work to make your financial freedom dreams a reality.

This step is vital for protecting your family and providing peace of mind. Having an emergency fund ensures that if something unexpected happens, you have the resources to handle it. However, it’s crucial to remember that this fund is for emergencies only—not for vacations or new car purchases. The goal is security and protection, not undermining your progress by dipping into these savings unnecessarily.

A financial coach can be an invaluable resource in this process. Coaches focus on helping you develop new money habits that prevent you from falling back into debt or overspending. With the right guidance and discipline, you can build a robust emergency fund and take confident steps toward achieving lasting financial freedom.

By creating a budget, establishing an emergency fund, and committing to a disciplined approach to money management, you’re setting the foundation for a secure and prosperous future. Keep moving forward—you’ve got this!